Supplemental Materials. A Post-DOMA Discussion on Tax & Estate Planning for the LGBT Community July 17, 2013

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1 Supplemental Materials A Post-DOMA Discussion on Tax & Estate Planning for the LGBT Community July 17, 2013 Post DOMA Income Tax Issues: How Should I file My Federal Taxes for 2012 and 2013? Illustrative Example of Federal Tax Marriage Bonus Illustrative Example of Federal Tax Marriage Penalty Comparison Chart of Single vs. Married Filing Joint Filing Statuses Amended Returns & Protective Refund Claims Including Statute of Limitations Chart

2 Post DOMA Income Tax Issues: How should I file my federal taxes for 2012 and 2013? As the Supreme Court s ruling on DOMA left many more questions than answers, same-sex couples are left wondering what status to use on their federal income tax returns. To this point the IRS has not issued guidance on how same-sex couples should be filing their 2012 or 2013 tax returns. Therefore, absent further guidance, use the chart below to determine the appropriate filing status for your 2012 and 2013 federal income tax returns based on your marital status and state of residence. Before filing any returns you should consult with your tax advisor. Who am I? What do I do for 2012? * What do I do for 2013? I am legally married and live in a marriage equality state File a joint federal return for 2012 ** File a joint federal return for 2013 Consider filing amended federal returns for any prior years in which you were legally married but barred from filing jointly and in a marriage bonus situation*** I am legally married and do NOT live in a marriage equality state File separate single federal returns for 2012 File separate single returns for 2013 Consider filing protective federal (and/or state) refund claims for this and any prior years in which you were legally married but barred from filing jointly and in a marriage bonus situation*** I am in a civil-union or domestic partnership and live in a state that recognizes it as such File separate single federal returns for 2012 File separate single federal returns for 2013 Consider filing protective federal refund claims if future guidance indicates you may benefit from doing so*** I am not in a legal marriage, civil union or domestic partnership It's too late to get married and change your 2012 filing status, therefore you must file separate single federal returns for 2012 If you get married by 12/31/13 and live in a marriage equality state, you can file a joint federal return for 2013 (see above) If you remain unmarried or get married and do not live in a marriage equality state you must file separate single federal returns in 2013 (see above) You cannot amend returns or file protective refund claims regarding filing status for years in which you were not legally married *Assuming both partners are on extension for 2012 and have not yet filed their federal tax returns **If one spouse has already filed and the other spouse is still on extension you should consult with your tax advisor regarding your 2012 filing status ***Only years in which the statute of limitations has not tolled will be available for amendment Provided based on information available as of July 16, 2013

3 Post DOMA Income Tax Issues: Illustrative Example of Federal Tax Marriage Bonus Many taxpayers legally married in prior years and required to file separate tax returns due to DOMA should consider filing protective refund claims to protect their right to receive refunds of the federal tax marriage bonus from which they previously could not benefit. To assist you in a preliminary evaluation of your situation, below is an illustrative example of two taxpayers that would have a substantial marriage bonus in Consider having a tax advisor evaluate your particular facts and circumstances to calculate if you were in a marriage bonus position in prior years. If so, seek advice on whether you should consider filing protective refund claims for those years. EXAMPLE Alan and Brian are legally married in the State of New York, but reside in the Commonwealth of Pennsylvania. Absent further guidance, they would not be able to file a joint tax return in Alan s annual salary is $453,250 and he receives $10,000 of employer provided benefits for Brian which are subject to federal taxation. Brain s annual salary is $43,250 and he contributes the maximum amount allowable to his individual Health Savings Account (HSA), $3,250. In 2013, Alan realized a $20,000 short-term capital gain and Brian realized a $25,000 long-term capital loss. Neither Alan nor Brian itemizes their deductions. By filing two separate tax returns as single taxpayers, Alan and Brian would pay over $16,000 more in tax for the 2013 tax year than if they were allowed to use the married filing joint filing status. Here s why: Alan s Employer Provided Benefits for Brian The $10,000 of benefits provided by Alan s employer for Brian are currently subject to payroll and income tax. If these benefits are no longer subject to taxation the total income and payroll tax savings would amount to just over $4,000. Increased Allowable HSA Contributions Brian s HSA contributions are limited to $3,250 as a single taxpayer. If Alan & Brian are permitted to file a joint return, that limit increases to $6,500. Assuming Brian maximizes his contribution, the net income and payroll tax effect of the increased contribution is just over $1,500. Netting Capital Gain / (Losses) Alan has a net capital gain, while Brian has a net capital loss. Two single taxpayers cannot net their capital gains and losses but married taxpayers who file jointly can. This has a substantial tax effect on Alan and Brian s tax liability. Alan s $20,000 short-term capital gain is reduced to zero by filing jointly, sheltering the gain from ordinary income tax rates as well as the new 3.8% investment income surtax. The net tax effect of offsetting Alan s capital gain with Brian s capital loss is just over $7,000! (Note: Alan & Brian s deductible net loss would be limited to $3,000 in 2013) continued on next page

4 Personal Exemptions Because Alan is a high wage earner, Brian would lose the tax benefit of his personal exemption when filing jointly. The net tax effect of this is less than $600 and is far outweighed by the tax benefits discussed above and below. Additional 0.9% Hospital Insurance Alan s wages over $200,000 would be subject to the 0.9% additional Medicare health insurance tax that began in 2013 if he had to file his tax return with a single filing status. By filing jointly, another $10,ooo of Alan s wages are sheltered from approximately $200 of additional tax because Brian s wages are $10,000 less than the additional exemption provided to married taxpayers ($250,000 vs. $200,000). Additionally, the nontaxable employer provided benefits and additional HSA contributions discussed above also reduce exposure to the HI tax. Different Tax Rate Schedules Alan & Brian will benefit from the married filing joint tax rate schedules by approximately $3,700 because Alan earns the majority of the couple s income. If Alan & Brian s income was more evenly split, they would see less or no benefit from the married filing joint tax rate schedules because the married filing joint tax rate schedules are not equivalent to two times the single tax rate schedules (see Illustrative Example of Federal Tax Marriage Penalty ). Summary MFJ Single - A Single - B Wages 496, ,250 43,250 Employer Benefits to Spouse - 10,000 - HSA contribution (6,500) - (3,250) Total Wages 490, ,250 40,000 Short-Term Capital Gain 20,000 20,000 - Long-Term Capital (Loss) (25,000) - (25,000) Net Gain/(Loss) (5,000) 20,000 (25,000) Allowable Gain/(Loss) (3,000) 20,000 (3,000) Less: Standard Deduction (12,200) (6,100) (6,100) Less: Personal Exemption - - (3,900) Total Deductions (12,200) (6,100) (10,000) Taxable Income 474, ,150 27,000 Ordinary Income Tax 135, ,715 3,604 Investment Income Sur-Tax Hospital Insurance Tax 2,160 2,369 - Payroll Taxes (FICA) 16,433 13,767 3,060 Total Federal Taxes 154, ,611 6,664 Total Marriage Bonus 16,015

5 Post DOMA Income Tax Issues: Illustrative Example of Federal Tax Marriage Penalty While the previous example detailed a marriage bonus situation, where two taxpayers filing jointly owed less tax than the same two taxpayers filing individually, the example below details a marriage penalty situation. In contrast to a marriage bonus, a marriage penalty occurs when two taxpayers owe more tax filing jointly than they would filing individually. While married couples in a marriage bonus situation should consider filing amended returns or protective refund claims, taxpayers that are in a marriage penalty should not revisit prior year returns if avoidable. Married couples should consult their tax advisors to determine whether they were in a marriage bonus or penalty situation for current and prior years to determine whether it will be beneficial to file amended returns or protective refund claims. EXAMPLE Alan and Brian s neighbors, Cecilia and Debbie are legally married in the State of Massachusetts, but reside in the Commonwealth of Pennsylvania. Absent further guidance, they would not be able to file a joint tax return in Cecilia and Debbie both work as tax accountants and earn annual salaries of $80,000 each. In addition to their passion for accounting, both Cecilia and Debbie are also avid real estate investors. When they re not preparing tax returns, the two are busy buying struggling properties and fixing them up to rent them out. In 2013, the couple jointly and individually owned several properties that they previously rehabilitated and now rent. After netting the rental income and losses of all of their properties, Cecilia incurred $28,000 of losses and Debbie incurred $30,000 of losses. In 2013, Cecilia and Debbie recognized $5,000 and $8,000 net long-term capital losses on investments, respectively. Neither Cecilia nor Debbie itemizes their deductions. By filing two separate tax returns as single taxpayers, Cecilia and Debbie are saving over $13,000 in taxes for the 2013 year than if they were required to file their tax returns jointly. Here s why: Capital Loss Limitations The tax code currently allows taxpayers to deduct no more than $3,000 of capital losses on their tax returns. Any excess loss over $3,000 is carried forward to be applied to future year s capital gains as well as up to the annual $3,000 deductible loss limitation. By filing two returns as single taxpayers, Cecilia and Debbie can each deduct $3,000 of losses on their tax returns. However, should Cecilia and Debbie file jointly, they would only be allowed one $3,000 deduction against all of their combined income. The extra deduction the couple is afforded when their filing statuses are single results in a $750 tax savings. Be aware that the $3,000 deduction is reduced to $1,500 for taxpayers filing married filing separately (MFS). Therefore, should the federal government recognize Cecilia & Debbie s marriage in the future they cannot eliminate this marriage penalty by filing MFS. continued on next page

6 Real Estate Allowance Phase-Out The biggest change that Cecilia and Debbie will see when they file jointly is the phase-out of the special allowance for rental real estate. Currently, the tax code allows up to $25,000 of passive losses from rental real estate to be deducted each year against a taxpayer s non-passive income (including wages) if the taxpayer actively participates and falls below certain phase-out levels. This allowance begins to phase-out when Modified Adjusted Gross Income (MAGI) exceeds $100,000. As Cecilia and Debbie s $80,000 individual salaries do not put them above this threshold, they are each able to deduct the full $25,000 of rental real estate losses. Together, these losses offset $50,000 of taxable income and reduce their combined taxes by $12,500. However, when filing jointly, Cecilia and Debbie s combined income is used to determine their MAGI. With $160,000 of income, the couple exceeds the MAGI level at which the allowance completely phases-out ($150,000) and therefore they would not able to deduct any of the rental real estate losses they incurred during the year. As with the capital loss limitation described above, the rental real estate allowance is reduced by half, to $12,500, for taxpayers filing MFS. The phase-out levels are reduced by half as well. Accordingly, if Cecilia and Debbie s marriage was recognized by the IRS and they chose to file MFS, neither of them would be able to take any deduction for their rental real estate losses as both of them would phaseout at the reduced levels. Also note that regardless of whether Cecilia and Debbie were to phase-out of the rental real estate allowance, by filing jointly, they would only be able to deduct a maximum of $25,000 of rental real estate losses on their tax return. This is in contrast to each being able to claim $25,000 of these losses when filing single. Summary MFJ Single - C Single - D Wages 160,000 80,000 80,000 Long-Term Capital (Loss) (13,000) (5,000) (8,000) Allowable Gain/(Loss) (3,000) (3,000) (3,000) Net Rental Loss (58,000) (28,000) (30,000) Allowable Real Estate Deduction - (25,000) (25,000) Less: Standard Deduction (12,200) (6,100) (6,100) Taxable Income 144,800 45,900 45,900 Regular Tax 28,058 7,404 7,404 Payroll Taxes (FICA) 12,240 6,120 6,120 Total Federal Taxes 40,298 13,524 13,524 Total Marriage Penalty 13,250 continued on next page

7 Additional Marriage Penalty Situations The example above is just one of a slew of different situations that can result in a marriage penalty. There are many other situations where a couple s tax is greater when filing jointly than their combined taxes when filing individually. Some of the more prominent examples include: Net Investment Income Tax - Couples where one spouse earns a substantial amount of net investment income (often a retiree) and the other spouse earns substantial ordinary income, such as wages or self-employment income, can be significantly penalized by filing jointly. If the retiree s MAGI income is below the applicable threshold, none of their investment income would be subject to the 3.8% investment tax. However, when filing jointly the employed spouse s income can push their combined MAGI over this threshold and subject all of the retiree s investment income to the 3.8% tax. Preferential Capital Gains & Dividend Rates - In addition to increased net investment income taxes, couples with one spouse earning investment income and the other earning ordinary wage income can be penalized when filing jointly due to an increase in the preferential tax rates given to capital gains and qualified dividend income. When filing single, both taxpayers may be able to take advantage of the lower rates available for this type of income if their AGI is low enough. However, when filing jointly, the couple s income may be too high to qualify for the preferential tax rates and could be taxed at a higher rate. Few taxpayers will be identical to a specific illustrative example. More often than not, couples will see a mix of marriage bonus items and marriage penalty items when comparing their returns prepared jointly versus individually. Accordingly, it is important to have your tax advisor look at your situation to determine if you are in an overall marriage bonus or marriage penalty position for a certain tax year. Once informed, you can determine whether it makes sense to file amended returns or protective refund claims for prior years in which the statute of limitations is still open.

8 Post DOMA Income Tax Issues: Comparison of Single vs. Married Filing Joint Filing Statuses Though the Supreme Court s ruling on DOMA will allow some legally married same-sex couples file joint returns, some may still be prohibited from filing jointly. Below is a chart comparing some of the differences between filing two separate returns with a single filing status versus filing one return with a married filing joint status. Ref Ref Married Couple Filing Two Separate "Single" Filing Status Returns 1,2 Married Couple "Married Filing Joint" Status 1 Capital Gain/(Loss) Off-Set Not Allowed Allowable 3 Annual Maximum Deductible Capital Loss ($6,000) ($3,000) Net Operating Loss & Ordinary Income Offset Not Allowed Allowable 4 Annual Maximum Deductible Rental Real Estate Losses ($50,000) 5 ($25,000) 5 Maximum Mortgage Interest Deduction Debt Limitation $2,200,000 6 $1,100,000 6 Standard Deduction $12,200 $12,200 AGI Threshold Range for Phase-out of Personal Exemptions $500,000 - $745,000 $300,000 - $422,500 AGI Threshold for Phase-out of Itemized Deductions $500,000 $300,000 MAGI Amount Where Social Security Benefits Become 50% Taxable $50,000 $32,000 MAGI Limit Where Social Security Benefits Become 80% Taxable $68,000 $44,000 Child Tax Credit Phase-out of $50 for each $1,000 MAGI is over: $150,000 7 $110,000 7 MAGI Phase-out Range for Contributions to ROTH IRAs $224,000 - $254,000 $178,000 - $188,000 MAGI Phase-out Range for Contributions to Traditional IRAs $118,000 - $138,000 8 $95,000 - $115,000 8 Annual Investment Income Exemption for Investment Surtax $400,000 $250,000 Annual Earned Income Exemption for Hospital Insurance Tax $400,000 $250,000 Annual Alternative Minimum Tax Exemption $103,800 $80,800 Acronym Glossary AGI = Adjusted Gross Income MAGI = Modified Adjusted Gross Income Footnote References: 1 - Based on Tax Year Equates to limits for Single Taxpayer x No limit to capital gain offset. Net annual deductible capital loss cannot exceed $3, Income offset limited to AGI and itemized deduction limitations 5 - Subject to income phase out limits. 6 - Assumes at least two homes are owned by the couple 7 - Assumes two children, with each spouse claiming one as a dependent. 8 - Assumes both spouses are covered by a Qualified Retirement Plan Provided based on information available as of July 16, 2013

9 Post DOMA Income Tax Issues: Amended Returns & Protective Refund Claims If you were legally married in prior years and required to file separate tax returns due to DOMA, you should consider filing amended returns or protective refund claims if you were in a marriage bonus situation or if you paid income tax on benefits provided by your employer to your spouse. Individual Statute of Limitations ( SOL ) for Refund Claims Latest SOL Original Extended Timely Filed Expiration for Tax Year Due Date Due Date SOL Expiration Ref. Extended Returns Ref /15/ /15/2010 4/15/ /15/2013 2, /15/ /15/2011 4/15/ /15/ /15/ /15/2012 4/15/ /15/ /15/ /15/2013 4/15/ /15/ Footnote References: 1 - If you file earlier than the original due date, the statute runs based on the actual due date. 2 - If you had a valid extension, the SOL expires 3 years after the actual date you filed (NOT the extended due date) or 2 years after the date you paid the tax, whichever is later. 3 Some 2009 returns may have an open SOL expiring in the next few months. 4 An unanswered question remains regarding tax years where one spouse filed timely and the other had a valid extension of time to file. Tax Warrior Advice: In order to know if you would benefit from filing an amended return or protective refund claim in a year where the SOL is still open, you should consult with a tax advisor who can quantify potential refunds. Though it is still unclear if the Supreme Court decision in the Windsor case will apply retroactively to all affected taxpayers, it may be worthwhile to file protective refund claims in situations where the SOL will expire before the issue of retroactivity is resolved. It is expected that the IRS will issues some type of streamlined procedure to facilitate protective refund claims filed as a result of the Windsor case. If the SOL is not set to expire for a tax year where you are in a marriage bonus situation or that you paid income tax on benefits provided by your employer to your spouse, you may want to consider waiting until further guidance is available. Glossary: Marriage Bonus When filing joint return results in less tax than two separate single returns. Protective Refund Claim An amended return filed to lock in a taxpayer s right in instances where the law is unclear or being litigated. A disclosure is added to the amended return and the claim is held by the IRS until the matter is finalized in the courts or through legislation. Provided based on information available as of July 16, 2013

10 Rosalind W. Sutch, CPA, MT Roz began working for D&S in 2002 as an undergraduate intern and quickly advanced in her career. In January 2009, Roz became the youngest shareholder ever at D&S. She provides business, tax and financial consulting services to large corporations and partnerships, high-net-worth individuals, entrepreneurs and closely held businesses. Roz often works with successful young business professionals in varying industries, including real estate, insurance and professional services. Roz began her career in public accounting in 1996 with an internship offered by her high school s Business Academy at a large public accounting firm. It was here that she learned she wanted to be an accountant. Roz transitioned from administration to tax preparation in 1998 when she worked with a sole proprietor in Lafayette Hill, Pennsylvania. There, she functioned as an office manager and provided tax services for individuals and small pension plans. Roz is a maxima cum laude honors graduate of LaSalle University, with a bachelor of science degree in accounting and management information systems. She also holds a master of taxation degree from Villanova University. She is a member of the American Institute of Certified Public Accountants, the National Society of Accountants and the Pennsylvania Institute of Certified Public Accountants (PICPA). In 2009, Roz was recognized by the PICPA as a 40 under 40 member to watch. This honor underscores her commitment to the profession of public accounting while showing enthusiasm in leading the profession into the future. Roz is a native of Philadelphia and resides in Bryn Mawr, Pennsylvania, with her husband, Jason. Jason is an avid bowler and was once a member of the Professional Bowlers Association. Her son, Matthew, is an accomplished gymnast and a Level 5 All Star cheerleader. He spends numerous hours every week in the gym both training and coaching. Roz is the youngest of eleven children and enjoys spending time with her considerably large family, which includes seventeen nieces and nephews and four great-nieces. When she is not attending family functions, she enjoys reading and working out. Roz is also very active in her community with various volunteer efforts, and was awarded the Volunteer Service Award in 2006 from the Greater Philadelphia Chapter of the PICPA. Roz can often be found on the campus of LaSalle University as a volunteer alumna where she is a member of the Council of President s Associates, a regular participant in School of Business Administration events and a participant in on-campus student recruiting efforts for D&S. She is also an active participant in her parish s liturgical ministry, where she regularly lectors, and has been a top fundraiser for the Philadelphia Diabetes Walk for many years. 327 N. Washington Avenue - Suite 400 Scranton, PA