Costly tax headaches for same-sex couples, even in NY

After 13 years together, Maggy Porter and Arlene Bronfman began to talk last June about marriage when New York State passed its Marriage Equality Act. Until, that is, the New York City couple visited their accountant.

"What was supposed to be this way of expressing our love was going to seriously confuse our taxes, investments, estate planning, really all our finances," says Porter, a registered nurse. "Our CPA is great, but even he seems pretty bewildered."

In the end, romance won out over finances, and Porter and Bronfman plan to marry in March despite the financial complications and expected tax hassles.

While marriage can save heterosexual couples a bundle, it could cost same-sex couples thousands of dollars in extra taxes and professional advice because the federal government still doesn't recognize the marriages.

Married same-sex couples must file separate federal tax returns but can file joint state returns in New York, where the marriages are legal.

"Filing taxes for same-sex spouses is much more complicated, more expensive and time-consuming, and there is very little guidance from the IRS or elsewhere," says Pan Haskins, a certified public accountant in San Francisco.

Financial planners advise that hiring an accountant or a certified financial planner is usually a smart move due to the complications. For do-it-yourselfers, TurboTax and H&R Block, makers of two leading tax preparation software programs, have updated their offerings to help same-sex couples navigate filing two federal returns and the specific tax needs for their individual state.

New York State advises couples do two sets of federal returns -- official individual returns for each partner, and a dummy return as if the pair were filing jointly. The joint return is "not to submit but to use it as a work sheet so that you are bringing the correct income information onto a joint state return," says Ed Walsh, spokesman for the state Department of Taxation and Finance.

Some same-sex spouses are fed up enough to submit that joint federal return. Haskins reports, in her experience, the IRS has so far not challenged same-sex married returns. (IRS forms don't ask for gender identification.) But she warns couples who file federal returns jointly that they risk financial penalties and a potential audit. "This," she says, "is still the Wild West of financial planning."

Tax tips for same-sex spouses

Tax tips for straddling the federal-state divide on same-sex marriages

CONSIDER holding assets jointly. Income or expenses from joint assets can be allocated all or in part to either owner's return.
 

INCOME (e.g. interest, dividends, capital gains) may be shifted to the partner with the lower income, while deductions (e.g. mortgage interest, real estate taxes, capital losses) may be claimed by the partner in the higher income tax bracket. This could lead to tax savings for both partners.
 

PAY attention to taxes on health insurance. Unlike heterosexual marriages, employer-based health coverage for same-sex spouses is not tax-exempt, and employers must report it as income to the IRS.