Since the Supreme Court struck down Section 3 of DOMA, employers and employees face numerous issues, including whether to file claims for tax refunds. [Additional background information may be found here.]
Background. The Internal Revenue Code permits employers to provide nontaxable group health coverage to their employees’ spouses. However, employers who extended group health coverage to domestic partners and, prior to Windsor, same gender spouses were required to impute, and report on the employee’s W-2, income equal to the fair market value of that coverage. Also, the employer was required to withhold federal income and employment taxes and pay the employer’s share of FICA and FUTA.
Employers. Now that same gender marriages are recognized for federal purposes in certain states, employers who have extended group health coverage to same gender spouses should, on a going forward basis beginning June 26 (the date Windsor was handed down), stop imputing income and withholding and paying employment and income taxes. Employers should also consider filing protective claims for refund of employment taxes paid for prior years.
Employees. Individuals in same gender marriages should also consider filing protective claims for refund for the imputed income. In addition, couples in same gender marriages may wish to explore whether they should file amended returns as married filing jointly. However, the advisability of an amended return depends on whether filing jointly or as a head of household will be advantageous.
Issues to be resolved. Although Edith Windsor will receive a refund with interest of the federal estate tax that she paid (U.S. v. Windsor is an estate tax refund case), it is not clear whether the IRS will give Windsor general retroactive effect. In general, claims for refund can be filed only for the open tax years (generally 3 years after the return was filed). Even if the IRS gives Windsor retroactive effect, the period for filing a refund claim may also depend on when the couple’s state of residence recognized same gender marriage. For example, Massachusetts recognized same gender marriage in 2004 while Maryland recognized same gender marriage beginning January 1, 2013. If the couple moves from the state in which the marriage was performed to a state that does not recognize same gender marriage, it is not clear whether the marriage will be treated as valid for some or all federal law purposes even though the state of residence does not recognize the marriage.
Officials from the IRS have said that they expect to issue guidance in the near future to clarify at least some of the issues raised by Windsor. The guidance should include clarification of the retroactive effect and whether and how refund claims may be filed.