IRS Issues “State of Celebration” Guidance for Same-Sex Couples - Further Guidance by 24 States May Be Required

August 29, 2013 - Tax Foundation

By Joseph Henchman

Executive Summary

The IRS today announced that, beginning with the 2014 tax filing season, they will use a “state of celebration” standard for recognizing marriages.[1] Consequently, any couple possessing a marriage license from any U.S. state may file a joint federal tax return. This standard is in contrast to a “state of residency” standard, in which federal joint filing would be permitted only by residents of states that recognize the marriage as valid.

Guidance from the IRS is required to conform the tax code to the Supreme Court’s June 2013 decision in United States v. Windsor, which struck down section 3 of the Defense of Marriage Act (DOMA).^[2] That decision invalidated a federal definition of marriage as between one man and one woman, and general reaction at the time suggested that the definition of marriage would thus revert to state law: if a state recognized your marriage, the federal government would recognize it; however, if a state did not recognize your marriage, the federal government would not. This interpretation is supported by the fact that Section 2 of DOMA, which permits states to refuse to recognize marriages that are at odds with their state’s public policy, was not struck down.^[3]

However, a “state of celebration” standard is broader, affecting even same-sex couples who have obtained a marriage certificate but currently live in a state that does not recognize their marriage as valid. The administration asserts that “state of celebration” is in line with private industry practice, which provides benefits to any employee that can demonstrate they are married, regardless of where they live. Many may cheer the result, which resolves federal tax ambiguity for same-sex couples in the 13 states and the District of Columbia that recognize their marriage.^[4]

The next step must be taken by the 24 states that do not recognize same-sex marriage but require taxpayers to reference the federal tax return when filling out their state tax form. 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.

An option that should not be considered is to “delink,” or “decouple,” the state’s tax code from the federal tax code. Such a step would impose huge compliance costs on nearly all state taxpayers and potentially cause economic damage. Such a response would be disproportionate since other viable options are available.

Tax Filing by Same-Sex Couples Before and After the IRS Ruling

To illustrate, take two same-sex couples, one living in Maryland (which recognizes same-sex marriage) and one living in Virginia (which does not). The Maryland couple, in the past, has been able to file a joint state return but has had to file separate federal returns. (Because Maryland’s return references information on the federal return, Maryland and other same-sex marriage states have permitted taxpayers to prepare a “dummy” federal joint return to reference when preparing the state return.) Under either a “state of celebration” or “state of residency” rule, the Maryland couple would now be able to file joint returns at both the federal and state levels. 

The Virginia couple has never been able to file joint returns at the federal or state levels, but because the IRS has adopted a “state of celebration” standard, they may now file a joint federal return so long as they have a marriage certificate issued by another state that recognizes same-sex marriage. Under a “state of residence” standard, state law defining marriage would apply and the couple would not be able to file federal or state joint returns. But under a “state of celebration” standard, the couple can file jointly at the federal level but must continue to file separately at the state level.

Table 1: Differences between “State of Residency” and “State of Celebration” Standards