Wednesday, June 18, 2014

Amended Returns Due to DOMA Case - What Needs to be Done

Originally published on Passive Activities and Other Oxymorons on February 27th, 2011.
This blog is my blog so I make the rules and get to decide when I'm going to break them.  One of the rules is that I don't talk about what the tax laws should or should not be.  The motto is "It is what it is. Deal with it."  So I observe, find humor, matter for reflection or practical implications.  When an ordained trumpet player gets a $195,000 "parsonage exclusion" on his second home, I might break the rule and express an opinion.  DOMA has enough people expressing opinions, so I'm sticking with the practical implications.  If you would like some passionately informed opinion check out Gay and Lesbian Advocates and Defenders and the Massachusetts Family Institute.  GLAD was managing the plaintiff side of Gill v OPM.  MFI says it will be seeking to pick up the defense ball that the Administration has abandoned.  Both organizations agree that the case is important.  Other than that they appear to differ.

What I'm thinking about is what Robin and Terry should do. Robin and Terry are a couple of indeterminate gender and marital status who were invented to help me deal with awkward pronoun problems.  For now they are of the same gender, live in Massachusetts and were legally married in Massachusetts in 2007.  If I was writing a novel, this is the church, where they were married, but that level of detail is really not necessary.  The administration's decision doesn't really change my opinion on what needs to be done.  It just increases the urgency a bit, since it makes it somewhat more likely that part of DOMA will be definitively declared unconstitutional.

Robin and Terry have been filing their federal returns as single, because they are law abiding.  I'm going to assume that they have foregone all the clever ideas I described in my post on the tax advantages of not being married for federal income tax purposes.  So there is a chance that if they were allowed to file a joint federal return their aggregate tax liability would be lower.  So can they just wait for the DOMA drama to resolve itself and then file amended returns?  Not exactly.  Any refund claim they make has to be filed before the statute of limitations expires for that year.  Putting aside extensions that means that 2007 is looming.  I'm not going to get into a fine tuned discussion of Emancipation Day and Patriots Day.  The statute expires in the middle of April and the IRS has to receive the claim before the statute expires (No timely mailed, timely filed rule for amended returns). So get this taken care of soon.

How can you tell if Robin and Terry will save money by filing a joint return ?  There is really only one way.  You have to do the return.  Someone might tell you that the wider their discrepancy in income, the more likely they are to benefit from a joint filing and conversely if their incomes are close DOMA is probably saving them income tax.  Computing federal income tax, however, involves a host of thresholds, percentage computation and special limitations.  To take a simple example.  Robin and Terry each make $200,000 per year in salary.  Robin is a brilliant stock picker.  Terry is, well, an idiot when it comes to investing.  Robin has $300,000 in capital gains.  Terry has a $500,000 capital loss carryover that promises to last out the new millennium if Terry should live so long.  On the separate returns there is a positive $300,000 on one return and a negative $3,000 on the other.  On a joint return there is just the negative $3,000.

Another example.  Robin makes $250,000 and Terry makes $75,000.  Terry has $40,000 in medical expenses while Robin has none.  Terry's medical deduction is $34,375.  That would be reduced to $15,625 on a joint return because of the higher 7.5% threshold.

One more example.  Robin makes $75,000 per year and Terry makes $300,000.  Robin owns some rental properties that amazingly lose money.  Robin actively participates in running the properties and deducts $25,000 of the losses, the other $10,000 being suspended.  On a joint return with Terry they would all be suspended unless, of course, Terry owned a real estate brokerage business.  Then they could all be currently deducted.

Then there is the alternative minimum tax.  Don't even get me started.

This particular problem does not require the conceptual thinking of a tax attorney or an algorithm designed by a software engineer.  It requires a seasoned tax preparer, preferably one with good software.

I don't think it is at all likely that DOMA being declared unconstitutional will affect the returns of people who filed as single, whose tax would be higher if they had been considered married.  CCA 201021050 ruled that registered domestic partners in community property states should each report half of their own and their partners income.  The ruling made amending returns for open years optional.  Presumably it would be the same for a DOMA change.  The optional money saving amended returns will only be available for open years, though.  Only those who file claims before the statute expires on each year will be able to benefit from those years.

The other consideration in filing joint returns, which I mentioned in last week's post on this issue is joint and several liability.  If Robin thinks that Terry may have omitted significant income, then Robin should not join in an amended return regardless of the apparent savings.

So that's it for the practical aspect, which I must say seems to be largely neglected in the rest of the blogosphere.  I do have two reflections on the issue.  The first is that I think it is fascinating that someone with a very conservative view of the Constitution should really likely the Gill decision.  It is a states rights case.  It has always been up to the states to say who is or is not married and DOMA is a violation of that principle.  I'm still searching for the honest person that doesn't have the same opinion on Gill v OPM and Perry vs. Schwarzenegger, because of their strong belief in either states rights or federal supremacy.  I think that the Constitution is generally used by activists as a drunk uses a lamppost, more for support than illumination.

The other observation, which may seem slightly mawkish, though I assure it is quite sincere, is that I feel very blessed that I live in a country where GLAD and MFI are fighting this battle with briefs and news releases.  As I noted they both seem to agree that what the court has to say is very important.  I don't think we are always as grateful for that type of agreement, as we should be.

Post Script

The Santa Clara Law Same Sex Tax Law Blog has posted something on the practical points of filing for a refund based on the DOMA decisions.

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