Originally published on Passive Activities and Other Oxymorons on March 14th, 2011.
The official position of this blog on all matter of what the tax law should be is "It is was it is. Deal with it." I observe and seek practical pointers, humor and matter for reflection. I break my rule of indifference to what "should be" from time to time. The tax ramifications of the Defense of Marriage Act provide enough interesting items, that there is no need for my opinion.
Just to bring you up to speed, Section 3 of the Defense of Marriage Act provides, that, for all purposes of federal law, marriage is only between persons of opposite gender and the word spouse means someone of the opposite gender. Several states, including Massachusetts, allow persons of the same gender to marry. Such persons are considered either single or head of household (depending on their circumstances) for federal income tax purposes. Accordingly they are not eligible to file joint returns. I have a mythical couple called Robin and Terry, whom I invented to avoid awkward pronoun problems. Robin and Terry are of indeterminate gender and marital status. For purposes of this post, they are of the same gender and were married in Massachusetts in 2007.
Section 3 of DOMA has been the subject of litigation. The Federal District Court of Massachusetts in Gill v OPM has ruled that it is unconstitutional, because it has no rational basis. The Justice Department had indicated that it would appeal the ruling. Generally the Justice Department defends the constitutionality of laws passed by Congress regardless of what the current administration thinks of them. The view is that "unconstitutional" and "bad idea" are not synonymous. The Justice Department has recently, however, concluded that Section 3 of DOMA is indefensible. So the Administration will not fight it in court any more. They will continue to enforce it. So as far as the IRS is concerned Robin and Terry are still not married.
If I were in charge of the vast right wing conspiracy what I would do is have Congress now repeal Section 3 of DOMA. What they would say is that they were repealing it not on an equal protection theory, but because it violates the 10th Amendments. It's up to the states to decided who is or is not married and if a couple of states are infected by crazy liberal ideas, the rest of just have to live with it. Besides, there is some evidence that on net the overall collection of federal tax would be higher if same sex marriages were recognized for federal purposes.
Instead conservative congressman are going to have Congress take up the defense of DOMA in the courts. By doing this they are, in effect, subsidizing same sex marriages. Here is why. People whose marriages are recognized for federal taxes can file either jointly or married filing separately. People whose marriages are not recognized for federal purposes file as single or head of household depending on their circumstances. Of the four rate tables married filing separate is the worst. I just ran the numbers on someone who was single as if he were married filing separately. It cost him about $4,000. Taking two married filing separate returns and turning them into joint will almost always save money (An exception might be if one of them had large medical expenses). Taking two single returns or a single return and a head of household return and turning them into a joint return is much more unpredictable. It could go either way. ( I should also point out that there is a benefit to the government from joint returns that taxpayers and planners often ignore. By filing a joint return the taxpayers assume joint and several liability. That means the government can collect the whole tax from either one of them.) So the ideal situation would be for you to be able to choose on a year to year basis whether you are single or married for federal income tax purposes. The unwillingness of Congress to throw in the towel on Section 3 of DOMA, in effect, puts Robin and Terry in that situation.
Under the law in effect now Robin and Terry are single for federal income tax purposes. If that gives them the most favorable tax, they can just file that way and not worry. I don't think there is any likelihood that if Section 3 of DOMA is declared unconstitutional there will be examinations of returns of people who have been filing as single. If I was in charge of the vast right wing conspiracy, I would certainly be threatening that. "You want marriage equality. Fine you have it. Send in four grand." When the IRS recently ruled that registered domestic partners in community property states have to split their income, they made filing amended returns for open years optional. Presumably if Gill v OPM is upheld, there will be a similar outcome.
Because of Gill v OPM, however, Robin and Terry have a reasonable basis for filing a joint return if that saves them money. The conservative thing to do is to file as single and then put in a claim for refund, but if they are feeling wild and crazy they can just file the money saving joint return and their only exposure should be the interest. Now I am precluded from giving advice based on the audit lottery, but an observation I would make as a policy matter, is that there is nowhere on the return, where they ask you what your gender is. It is conceivable that I could prepare Robin and Terry's return and engage to represent them in an audit without knowing what the gender of either of them was. If they told me they were of the same gender, I'd tell them all about DOMA and Gill v OPM, etc, but frankly if Robin came in with all the information or we handled everything through the mail or our portal, it would not occur to me to ask. It's a little antediluvian, but you have to be careful about asking guys my age whether they are married to a guy.
So, there is a very respectable conservative argument for repealing Section 3 of DOMA (States rights) and continuing the court fight means that same sex married couples, in the aggregate will be paying less federal tax. Is this the working of the vast left wing conspiracy ? Is the vast right wing conspiracy shooting itself in the foot ? Or is much of the world run by random knee jerk reactions without much long term thought ? To me when it comes to tax law my motto is "It is what it is. Deal with it." How it gets that way is a little mysterious and of little practical importance.
I think I'm going to give Robin and Terry a break for a while. There are some other developments that I will focus on in the next few posts.