Margaret Selby, left, and her spouse, Colette Hayward, took legal action to assert their rights as a married couple but now pay a price when they pay taxes.

Steve Ruark, New York Times

Same-sex couples face a doubly trying tax season

  • Article by: PETER APPLEBOME
  • New York Times
  • February 16, 2013 - 3:22 PM

For Colette Hayward and Margaret Selby, the problem is this: Maryland recognizes their 2009 marriage, but the federal government does not.

The ramifications are maddeningly complex, no more so than when they deal with the Internal Revenue Service. Two years after taking legal action to assert their rights as a married couple, they are paying a price when they pay their taxes.

For Hayward, a lawyer who owns two construction businesses, and Selby, a Baltimore County police officer, a big issue involves insurance benefits they fought to achieve. They are paying taxes on those benefits, even though such benefits for spouses normally are not taxed.

For same-sex couples across the United States, an offshoot of being married is a dizzy­ing set of complications in computing taxes. Although nine states and the District of Columbia have approved same-sex marriages — two others recognize marriages conducted elsewhere — the 1996 federal Defense of Marriage Act (DOMA) prohibits such unions from being recognized by the federal government. (Minnesota does not recognize same-sex marriages or civil unions.)

Hayward, 47, and Selby, 48, have two children and three grandchildren. They were together for 18 years before they married in Massachusetts. Soon after their marriage in 2009, Selby filed a request with the Baltimore County Police Department to add Hayward to her health care coverage and to make sure she was eligible for other benefits available to officer’s spouses. She was turned down.

Lambda Legal, the gay, bisexual and transgender advocacy organization, filed an administrative grievance, arguing that denying benefits to a married couple, gay or straight, was contrary to Maryland law. It cited a 2010 opinion by the Maryland attorney general, Douglas Gansler, which noted the state’s long-standing law recognizing out-of-state marriages, including same-sex ones.

In 2011, an arbitrator ruled in the couple’s favor. But the victory came with a catch. Generally, health insurance benefits are not taxable, and adding a spouse or child to an insurance policy has no tax consequences. But because of DOMA, their insurance is treated not as a spousal benefit, but as imputed income, and thus subject to federal income tax. Hayward said Baltimore County told the couple that adding her to the policy increased the cost of the insurance by about $8,000 a year. She figures that it will increase their overall tax bill by about $2,500 to $3,000.

“We never expected this,” Hayward said. “We didn’t sit there studying the IRS code thinking we might be facing a major tax hit.”

Tax issues for same-sex married couples are numerous and often require expert advice to navigate.

Because same-sex couples are not permitted to file federal returns jointly, they cannot combine incomes and deductions to take advantage of lower tax rates and the benefits that can accrue, say, from balancing profits and losses in financial transactions.

Issues also arise when same-sex couples have children or other dependents, because they cannot file joint tax returns and may not both be legal parents. That complicates exemption claims and child care benefits, including education tax breaks.

Perhaps most significantly for couples with major assets, DOMA prevents same-sex couples from taking advantage of estate tax exemptions, about $5.1 million for 2012 — but double that for couples. If one member of a same-sex couple dies and leaves a spouse $5 million, those assets would be taxed. For heterosexual couples, there would be no tax.

That tax disparity is at the heart of the first challenge to DOMA to reach the U.S. Supreme Court. It was filed by Edith Windsor, who married Thea Spyer in 2007. When Spyer died in 2009, she left Windsor her share of their cottage in Southampton, N.Y., valued at $550,000, and an apartment on Fifth Avenue in Manhattan valued at $1.3 million. The result was a $600,000 federal and state estate tax bill.

“I was indignant and hurt,” Windsor said. “If her name had been Theo instead of Thea I would have owed no taxes.”

The extra costs extend even to the tax-­filing process. For same-sex couples in states that recognize their marriages, couples must prepare two sets of federal returns — one that they will actually file, and another prepared as if they were married, to help prepare their state tax return.

Not having a marriage recognized for tax purposes can actually be an advantage, and the repeal of DOMA could cost some same-sex married couples some money. Just as many married couples are hit with the so-called marriage tax, many same-sex couples save money by being forced to file separately.

“I think a lot of same-sex married couples in high income ranges have no idea that once their marriage is recognized they will be paying a lot more in federal income tax because of the marriage tax penalty,” said Patricia Cain, a tax law professor at Santa Clara University, who is herself in a same-sex marriage.

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