September 15th IRS Effective Date for Same Sex Couples
Recent IRS announcements describe how the IRS will apply the Supreme Court’s decision striking down the Defense of Marriage Act (DOMA). These announcements contain multiple references to a September 16, 2013 effective date. This effective date creates a September 15 deadline for same-sex couples to make certain tax-saving moves, and also create a “wait-until-after-September-15” situation for certain other possible moves.
Sell before September 16? The IRS contains a large number of provisions which put related parties who engage in certain transactions at a disadvantage when compared to unrelated parties who engage in the same transaction. Persons who are married to each other are considered related parties. In other words, being married can be both a blessing and curse. For example, IRS Section 267 provides that there is no deduction for a loss upon a sale or exchange of property between related parties. Similarly, IRS Section 1031 takes away like-kind exchange deferral of gain when an exchange is made by related persons and either person disposes of the property within two years.
The IRS also includes provisions that put a person at a tax disadvantage when the taxpayer enters into a transaction involving ownership interests in corporations, LLCs or other entities, where a related party owns an ownership interest in the same or a related entity. For example, IRS section 302 provides that a taxpayer gets sale-or-exchange treatment when he or she redeems stock in a corporation if the redemption is a substantially disproportionate distribution to the taxpayer. The test of substantial disproportionality involves a calculation of the percentage of the corporation’s stock that the taxpayer owns, either actually and constructively. For this purpose, a taxpayer is considered to constructively own stock that is owned by parties to whom he or she is related.
Same-sex married couples who engage in these types of transactions before September 16 can escape those tax disadvantages, because they will not be treated as related parties before such date. But same-sex married couples who engage in these type of transactions after September 15 will be treated as related parties and will be subject to these disadvantages. If you or someone you know are about to enter into a transaction with a same-sex spouse, you should consult immediately with a tax advisor to discuss whether entering into the transaction before or after the September 15 effective date is most beneficial.
File Return Before September 16? The IRC provides both advantages and disadvantages to married couples, as compared to couples who are not considered married for tax purposes. Examples of such disadvantages are:
(1) married couples who file jointly are jointly and severally liable for the tax, penalty and interest due on the joint return.
(2) Use of excess capital losses to offset ordinary income is limited to $3,000 per return, except the limit is $1,500 for married persons filing separately. Therefore, two persons who are single can offset a total of $6,000 of ordinary income, while a married couple is limited to $3,000.
(3) Married couples who file jointly fall into tax brackets with higher tax rates than they would if each person filed as a single. As a result, the total tax paid by the couple is higher if they file as marred and not as single.
Same-sex married couples who have not yet filed their 2012 or earlier open year tax return(s) should immediately consider whether it is beneficial for each of them to file as single for any one or more of those prior years. If the couple determines that there is a reasonable likelihood that there will be tax savings if they file single, then the couple should file single returns before September 16. On and after this date, a same-sex married couple will not be able to do so. A single return should be filed even if it is not entirely complete. The return can be amended later to complete any missing or incomplete items. These returns can even be amended from single filing status to joint filing status if further analysis shows filing jointly would be advantageous.
“Wait-until-after-Sept.-15” to engage in certain transactions? The IRS also contains a number of provisions which put related parties who engage in certain transactions at a tax advantage when compared to unrelated parties who engage in the same transaction. For example, while gifts are generally subject to gift tax (or use up part of the taxpayer’s lifetime estate and gift tax exclusion), gifts between married persons are not subject to these rules. Medical expenses are deductible if the status of a person as taxpayer’s spouse exists either when the medical services are rendered or when the expenses are paid. There is also an unlimited estate tax marital deduction for gifts or transfers at death to a spouse. So, a same-sex married person who is concerned with gift or estate tax on a transfer should wait until after September 15 to make gifts to his or her spouse or to pay for the spouse’s medical expenses.
If you have any questions or comments about how the IRS is going to treat same-sex couples for income or estate tax purposes please call one of our tax or estate planning attorneys at 937-223-1130 or Jsenney@pselaw.com.
AND ONE MORE THING. We are holding a seminar on various legal issues on Wednesday October 16th from 8 am (registration) 8:30 am to 10 am seminar at the Dayton Country Club. Breakfast will be served. Issues that will be covered during the seminar include: (1) Current procedures for common Immigration Issues; (2) Asset Protection and Succession Planning; (3) desirable/necessary LLC operating agreement provisions; and Document Retention and Data Preservation requirements. Space is limited.