By Melissa Myers and Michael J. Tucker, April 9, 2015.
Melissa Myers: Well, the height of tax season is almost behind us for 2014 filings.
Michael J. Tucker: What’s unique about this tax season is that 2014 was the first year many married Arizona same-sex couples are filing jointly for their federal and Arizona tax returns.
Myers: Right. Until Oct.17, 2014, when Arizona legally recognized same-sex marriages, couples that had married in other states had to file joint Form 1040 with the IRS and individual Arizona state returns.
Tucker: That rather cumbersome process required taking information from the couple’s joint federal return and extracting each individual’s income for the Arizona returns to reflect unmarried status.
Myers: There will be no more of that! Couples who married in 2014 or prior years in any state, now including Arizona, must now file joint returns for both federal and Arizona income tax. For 2014 and forward, the process should be much easier.
Tucker: A couple is treated as married for purposes of a particular tax year if they are married on Dec. 31 of that year.
Myers: We spoke with local tax professional Bob Lind, of Camelwest Tax Services, about his observations and experiences during this tax filing season.
Tucker: Lind notes a lot of confusion (and apparently some widespread internet rumors) wrongly suggesting couples that married toward the end of 2014 can choose to file taxes as unmarried, since they were not married for “most” of 2014.
Myers: Those who were legally married as of the end of 2014 and who nevertheless filed taxes as unmarried are technically filing fraudulent taxes, and they must amend their returns to correct that claim.
Tucker: Because 2014 was the first year for which many same-sex married couples filed joint income tax returns, some had interesting and perhaps unexpected results.
Myers: Depending upon their respective incomes, some couples experienced a “marriage penalty.”
Tucker: The income tax marriage penalty is not some new way to discriminate against gay people. For years, married straight couples that are dual income earners often owe more in income taxes than they would have owed if they hadn’t been married to one another.
Myers: Right. “Marriage penalty” describes the circumstances of a married couple that paid more in combined taxes than the total of what the two would have paid individually had they been unmarried. Lind elaborated further on this point and provided an example.
Tucker: According to Lind, “[s]ome parts of the inequity, referred to by many as the ‘marriage penalty,’ aren’t related to tax rates but rather certain peculiarities in tax law. For example, let’s assume a couple each has $80K of AGI, before claiming about $10K of losses from several rental properties they co-own and manage. If unmarried, they were able to use the rental losses to offset other income. But the ability to deduct such losses is generally suspended for those with AGI over $150K whether the return is for a single person OR a married couple. As a result they would not be able to claim that current deduction, increasing their income subject to tax by $20K.”
Myers: Among other surprises for same-sex married taxpayers this tax season, filing jointly instead of individually may have affected certain calculations for benefits such as healthcare subsidies, tax credits, education credits or federal student financial aid, if either spouse has children.
Tucker: If a couple is not yet married and is considering the financial and tax implications of a potential marriage, we suggest the couple first research the many details that may affect them. This may entail meeting with your financial, legal and tax professionals.
Myers: Some couples have been blindsided by unexpected tax consequences of marriage. Know what you’re looking at.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding their individual situation. Neither Camelback nor Commonwealth offers tax or legal advice.