With marriage, gay couples face tax tangles

By Kimberly Blanton, Globe Staff  |  March 14, 2005

The conflict between Massachusetts and federal laws on gay marriage is making the routine filing of taxes anything but routine for accountants, tax officials, and newly married same-sex couples such as Jan Donley and Diane Felicio.

The lesbian couple, who married on June 24, will have to prepare at least four returns -- twice as many as most married couples. There is the joint filing in Massachusetts, which sanctioned their marriage. Then there will be two individual filings with the federal government because it does not recognize their marriage.

But before they can do anything, they must fill out a ''phantom" federal tax return the IRS will never see: a joint married filing prepared solely to determine their state taxes, which are based on federal calculations.

''We'll have it framed and put up in our house," Felicio said. ''These things have historic significance."

It is tax time, and the honeymoon is over for gay and lesbian newlyweds wrestling with their first official tax filings as married couples. The Massachusetts Supreme Judicial Court ruling that legalized gay marriage on May 17, 2004, was a sweet victory for gay men and lesbian women nationwide. But it had no impact on the federal Defense of Marriage Act, which defines a legal marriage as between one man and one woman. Because the Internal Revenue Service will not accept joint married tax filings from same-sex couples, gay married couples are spending more time -- and sometimes twice as much money -- doing their 2004 taxes.

''It's the first mass demonstration of having to reconcile the difference between the state and the federal government on this issue," said Carisa Cunningham, spokeswoman for the Boston advocacy group Gay & Lesbian Advocates & Defenders, or GLAD.

Robyn Ochs, a Harvard University administrator who married on May 17, said she pays taxes just like everyone else. ''We should have the same rights and benefits as everyone else. Tax time is a painful reminder that's not yet true."

For tax professionals, gay marriage is causing a stir in a field that is as dry as decoding Schedules A and B. H & R Block, the nation's largest chain of walk-in tax advisers, wrote five case studies -- a first in response to a state-tax issue -- to train its Massachusetts tax preparers. Same-sex couples doing their own taxes have had to learn to trick tax-software programs to create a ''phantom" federal return as if the federal government recognized their marriage.

Accountants are also poring over Technical Information Release 04-17, issued by the state's Department of Revenue to answer myriad questions for married same-sex couples.

''I may be gray by April 15," said tax accountant Lillian Gonzalez of Sandberg, Gonzalez & Creeden in Stoughton, who prepares returns for more than 300 same-sex couples a year.

While tax returns generally have become more complicated and time consuming, same-sex filings pose additional complications. Married couples are permitted under state law to transfer assets, estate-tax free, to the other spouse when one of them dies. But tax attorneys note that while the state's advisory bulletin for same-sex spouses discusses ''joint property owned by husband and wife," it never explicitly states same-sex couples are eligible for that tax benefit.

''As is true with everything about same-sex marriage laws, it's about as clear as mud," said Deborah Manus, a partner at the Boston law firm Nutter McClennen & Fish.

Nothing to worry about, said Donald Twomey, attorney for the state's Revenue Department. ''Same-sex married couples are treated equally with opposite-sex couples," he said.

Some gay couples said they feel they are being forced to lie because they are filing two contradictory returns: for the federal they each must check the ''single" box, while for the state they must check ''married." How can both be true?

''How do you deal with the fact you sign your returns under the pains and penalties of perjuries?" asked Joyce Kauffman, a Cambridge financial adviser to lesbian and gay families.

''We understand those will not match up," said Twomey. IRS spokeswoman Peggy Riley acknowledged the state-federal conflict but said the IRS will deem same-sex couples' federal returns accurate so long as each one files individually.

GLAD, which sponsored a well-attended tax seminar in February, offers couples this suggestion: Put an asterisk on each individual federal filing indicating that they married in 2004. Better yet, write a letter disclosing they married. A couple married anytime in 2004 is considered married for the entire tax year.

''Will this flag a federal audit?" said Belmont financial planner Sharon Rich, whose clients include high-income, same-sex couples. She said that unusual circumstances can attract IRS auditors' attention. Taxes, she said, ''are getting people tied in knots."

Bruce Bell, coordinator of GLAD's legal-information hot line, did his and his partner's 2004 taxes on TurboTax software. He contends it was simple. First, he checked off married couple on a federal 1040 form so the computer would calculate their taxes that way.

Then he instructed the computer not to file the dummy return with the IRS but use it only to calculate state taxes. Finally, he produced two 1040 returns, one for himself, one for his partner. Those are going to the IRS.

Bell said he enjoyed a little revenge upon discovering the joint federal filing would have generated $200 more in tax revenues for the government than did their two individual filings combined.

Now that same-sex couples can file a joint married return in Massachusetts, whether there is a tax advantage depends on their finances. There is usually no difference regarding income because it is taxed at a flat rate. But for couples with investments, one spouse's losses can offset the other's capital gains if they file jointly.

Many same-sex couples are, for the first time, turning to professionals to prepare their taxes. Watertown financial planner Debra Neiman is warning gay clients to expect more cumbersome and expensive tax returns this year. She may charge up to twice her standard fee of $250 to $350, due to the extra work. ''It's the price you pay to change civil rights," she said.

Kimberly Blanton can be reached at blanton@globe.com.