The IRS recently announced that, beginning with the 2014 tax filing season, they will use a “state of celebration” standard for recognizing same-sex marriages. Consequently, any same-sex couple possessing a marriage license from any U.S. state that allows same-sex marriage may jointly file a federal tax return. This ruling creates some complications for the 24 states who do not recognize same-sex marriage but require taxpayers to reference the federal tax return when filling out their state tax forms. The nonpartisan Tax Foundation has released a new report detailing several viable options for states working to accommodate this federal change with minimal effort that would affect only a few taxpayers.
Same-sex couples in those states will be able to file a joint federal income tax return but need guidance on how to prepare their state income tax return. Assuming a state does not opt to recognize same-sex marriage by next year, viable options include:
permitting taxpayers to reference a “dummy” federal return reflecting single filing status for their state return, or
permitting taxpayers to “split” a joint federal return down the middle, using one-half for each single state return, or creating a new filing status permitting any taxpayer that files a joint federal return to file a joint state return, especially if the state presently recognizes civil unions or domestic partnerships.
“States should not consider the option of ‘delinking,’ or ‘decoupling,’ the state’s tax code from the federal tax code,” warns Joseph Henchman, Vice President of State and Legal Projects at the Tax Foundation. “At first glance, this may seem a viable solution, since deleting all state references to the federal tax code eliminates all need to refer to the federal tax return. However, decoupling is a move away from sound tax policy, because it increases tax burdens, reduces stability, and exacerbates an already complex income tax code. Individuals and businesses should be wary of states that have decoupled, since it signals that the state cares more about parochial definitions and rules instead of long-term economic growth.”
“Taxpayers pay income taxes, sales taxes, property taxes, and other taxes based on where they are when assessed, and taxpayers receive benefits based on which state they live in. The rise of swift transportation, instantaneous communication, and an interconnected world continue to challenge these deeply rooted historical standards,” adds Henchman. “Using a “state of celebration” standard may be more realistic and accurate, but it will present challenges in compliance and enforcement that would not occur under a “state of residence” standard. However, states have viable options for accommodating this federal change with minimal effort that would affect only a few taxpayers. States should resist calls to decouple, which would involve enormous costs for all taxpayers.”
Tax Foundation Fiscal Fact No. 393, “IRS Issues ‘State of Celebration’ Guidance for Same-Sex Couples: Further Guidance by 24 States May Be Required,” by Joseph Henchman is available online.
The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state, and local levels since 1937.