Tax Implications for Massachusetts Same-Sex Marriages

The May 17, 2004 recognition of same-sex marriages in Massachusetts created an unprecedented gulf between Federal and state law. In Massachusetts, same-sex spouses are eligible for all benefits available to opposite-sex spouses and also are subject to all requirements applicable to opposite-sex spousesfrom income, employment and state taxes, to state inheritance laws; see Technical Information Release (TIR) 04-17 (7/7/04).

Under Federal law, on the other hand, the Defense of Marriage Act prevents same-sex spouses from taking advantage of certain rights granted to married couples, such as filing status, Social Security benefits and the estate tax marital deduction; see Hillary Goodridge v. Dept of Pub. Health, 440 Mass. 309 (2003).

This item addresses the Massachusetts tax filing requirements for same-sex spouses and reveals the complicated road ahead for such spouses residing in that state and the practitioners preparing their taxes. Although in 2004, these issues apply only to Massachusetts residents, future years will inevitably see additional states recognizing such marriages. Until the Federal government follows the lead of these states, the compliance gymnastics described below will persist.

Effect on Federal and State Income Taxes

Because Federal law does not recognize same-sex marriages, same-sex spouses must continue filing individual Federal returns. Same-sex couples legally married and residing in Massachusetts are required to file either jointly or married filing separately. A pro-forma Federal joint return may need to be prepared to ease the calculation of those elements of state taxation that depend on Federal law.

For example, adjusted gross income (AGI) must be recalculated for state purposes to reflect AGI as if a Federal joint return had been filed. The pro-forma Federal joint AGI will be used to calculate the allowable Massachusetts deductions for medical and dental expenses in excess of 7.5% of AGI, certain miscellaneous deductions that exceed 2% of AGI and student loan interest, which phases out based on modified AGI (MAGI).

Another calculation that follows Federal law is the limit on passive activity losses from actively managed rental real estate. Under Sec. 469(i), the Federal limit for MAGI under $150,000 is $25,000 for both single taxpayers and for married taxpayers filing jointly, and zero for MAGI over $150,000. Under the MAGI cutoff, a same-sex married couple with large real estate losses may deduct up to a total of $50,000 on their Federal returns, while for Massachusetts tax purposes, their joint loss will be limited to $25,000.

Finally, dependent care expenses must be recalculated as if a joint Federal Form 2441, Child and Dependent Care Expenses, had been filed, because the deduction for dependent care expenses is calculated based on Federal earned income.

Sales and Use Taxes

Same-sex spouses qualify for the Massachusetts sales and use tax exemption on the sale or gift of a vehicle, trailer, boat or airplane between spouses. However, a gift tax return may be required for Federal purposes.

Employer Benefits

Spousal benefits provided to employees are generally excluded from Federal gross income; for Federal tax purposes, this exclusion does not apply to same-sex spouses and their children, unless they qualify as dependents under Sec. 152.

For state tax purposes, however, any benefits that are tax-exempt when extended to opposite-sex spouses are also tax-exempt when extended to same-sex spouses. Thus, the fair market value of benefits attributable to a same-sex spouse will be included in the gross income of an employee for Federal purposes, and excluded for state purposes. Some of the benefits affected include employer-provided health insurance, Sec. 125 cafeteria plans and qualified tuition reductions offered to employees and their families by educational institutions.

Estate and Gift Taxes

Many clients are unaware that marriage revokes a will unless the will was executed in contemplation of the marriage. If pre-marriage wills are not affirmed through a signed codicil at the very least, the individuals will die intestate and subject to state inheritance laws. A Massachusetts same-sex spouse dying intestate will receive a portion of the spouses estate by law, as follows:

^m            If there are surviving children, the spouse inherits one-half of the estate and the children inherit the remaining half.

^m            If there are no children, the spouse inherits the first $200,000, plus one-half of any excess, and the balance passes to living parents or, if none, to any siblings.

There is no Federal marital deduction on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, for same-sex spouses. It is not yet certain whether Massachusetts will allow a marital deduction for the calculation of Form M-706, Massachusetts Resident Estate Tax Return, as most of its estate tax laws reference the Federal laws, and the issue is not addressed in TIR 04-17.

Jointly owned property is included in full on a Federal estate tax return, unless:

1. The surviving joint owner can prove contribution to the acquisition of the property; or

2. The joint owners are married, in which case 50% of jointly owned spousal property is included on the return of the first to die.

For Massachusetts same-sex spouses, the first rule applies for Federal purposes; the second rule applies to the state return.

For more discussion of the Federal tax issues, see Downer, Tax Clinic, Federal Tax Implications of Same-Sex Marriage, this issue.

From Susan Day, CPA, Gray, Gray & Gray, LLP, Westwood, MA