My Big Gay Tax Return
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By John Cloud September 26, 2013
In the weeks after the June 26 U.S. Supreme Court decision gutting the Defense of Marriage Act (DOMA)—the 1996 law that barred any federal recognition of same-sex relationships—gay Americans exulted in pride parades around the country, with placards, buttons, and even underwear declaring “Ding Dong DOMA’s Dead.” But the most consequential response to the ruling came from an unlikely source: the Internal Revenue Service. On Aug. 29, the IRS said spouses in legal gay marriages could refile tax returns as joint couples for up to three years after their weddings. For some, the change would potentially mean thousands of dollars in refunds.
For taxpayers such as Evan Wolfson, however, IRS Revenue Ruling 2013-17 has prompted more ambivalence than elation. The 56-year-old Wolfson is the Harvard-educated attorney who runs Freedom to Marry, the leading organization advocating gay-straight equality in marriage laws. He helped devise the strategy that led to United States v. Windsor, the decision refuting DOMA. He not only has co-authored crucial legal briefs supporting gay marriage, he’s helped conceive many of the political tactics used in the 2012 elections to change the direction of the debate.
In October 2011, four months after New York Governor Andrew Cuomo signed a law allowing the state’s same-sex couples to wed, Wolfson married Cheng He, a health-care consultant he had met online in 2002. Their marriage was featured prominently in the Sunday Styles section of the New York Times. (I married my partner, Christian, the same month, although with far less fanfare.)
STORY: The IRS's Gay-Marriage Tax Problem
In the two years after getting married, Wolfson had his accountant send a letter to the IRS noting, he says, “that we were filing as separate even though we were married. For reasons of justice and education, I wanted to be on record.” The new IRS regulations don’t obligate gays to refile their taxes jointly, as married straight couples almost always do. Still, given Wolfson’s work on marriage equality, you might think he’d be first in line. But Wolfson has not given much thought to refiling his 2011 and 2012 returns. “Now as I approach it, I do so as a routine tax matter,” he says. “It may or may not be worth it.” Wolfson and He might end up paying more under the marriage penalty, which punishes couples that earn roughly equal salaries. They don’t want to report anything for prior years. Wolfson makes the point that equality means gay people should have “the range of choices” that straight people do when it comes to taxes, and that includes doing everything legally allowable to avoid paying them.
Wolfson’s stance shows how tricky the post-DOMA landscape has become—not just for gay couples who must now run numbers on how the ruling will affect their finances, but also for companies that previously required gay employees to use after-tax dollars to pay for health benefits for spouses. Many, from smaller startups to Google (GOOG) to Time Warner (TWX)—where I worked as a Time magazine journalist for 15 years—have struggled to promote gay-friendly workplaces and still comply with laws requiring that gay and straight employees be treated differently. Now those companies are trying to figure out how much they might owe gay employees who were married in the pre-Windsor era.
To put all this in context, it’s important to remember how fast the gay marriage debate changed. Gays filed a few token marriage equality cases in the 1970s and ’80s, but by the 1990s, gay activists had abandoned the fight—it appeared to be a loser in the courtroom and at the ballot box. Liberals worried that the issue could follow a trajectory similar to the abortion debate, which had helped create a new generation of conservative activists.
During the ’90s, the Human Rights Campaign (HRC), the largest gay political organization in the world, was focused on helping pass basic nondiscrimination ordinances in local jurisdictions as well as forging ties with corporate America. HRC’s first major foray into the marriage debate happened in 1998, when Hawaiians were debating one of the first state constitutional amendments to prohibit same-sex marriage. HRC spent an unprecedented $1 million on the battle and still lost 2 to 1.
STORY: The $51 Billion Wedding Industry Toasts a Post-DOMA Bump
After that defeat, gay activists retreated again from the marriage fight. In the interim, Wolfson as well as Mary Bonauto, a lawyer with a relatively small Boston-based group called Gay & Lesbian Advocates & Defenders, refined their legal arguments. Bonauto eventually worked with attorney Roberta Kaplan of the American Civil Liberties Union to push the case of Edith Windsor, a lesbian who had married her partner in Canada in 2007. The marriage was recognized by New York State, but when her wife died, Windsor had to pay more than $360,000 in federal estate taxes to inherit her property. The bill would have been zero had Windsor been a man. The ACLU, Wolfson, and Bonauto worked quietly to ensure the case would move slowly but deliberately through the judicial system.
STORY: The DOMA Ruling's Implications for Employers Explained
Among the nation’s 313 million people, about 3.8 percent, or 11.9 million, identify themselves as gay or lesbian, according to the Williams Institute at the University of California at Los Angeles. Based on many years of social psychology research, it’s fair to say the true gay population is higher—perhaps double. Today gay couples can marry in 13 states and the District of Columbia. By the time Windsor’s case reached the Supreme Court, about 230,000 gay Americans had been legally married, Christian and I among them. Prior to DOMA’s downfall, our accountant had recommended filing separately for both federal and state taxes to receive a larger return. The tax implications of gay marriage were still in flux.
We celebrated after the Windsor ruling, but then came the hangover. Over the years, many gay couples—mostly wealthy ones—had avoided paying millions of dollars in taxes by filing as singles. And financial advice firms specializing in gay wealth had developed an industry showing them how to do so.
Wealth adviser Salandra says at least 75 percent of her married clients will pay more because of the Windsor ruling. She is advising most not to file retroactive returns
“I work it so that legally, there’s the best situation for the household,” says Tina Salandra, 55, who manages roughly 550 accounts as part of her accounting practice with Christopher Street Financial, a leading wealth advice firm in New York for gay people. One old-fashioned method was for older gay people to legally adopt younger partners as children. Because the sexual and financial politics of such arrangements get so creepy so fast, Salandra doesn’t like to dwell on them. But she does say that at least 75 percent of her married clients will pay more because of the Windsor ruling. She’s advising most not to file retroactive returns that will reflect their legally married status at the time.
BLOG: DOMA’s Demise: A Wake-Up Call for Employers
In 2010, Salandra’s boss, Christopher Street Financial founder Jennifer Hatch, married her partner, Susanne Smith, a high-end realtor. They had been together for 19 years, during which Hatch advised thousands of clients on all the strategies to get around—or benefit from—the fact that gay unions weren’t recognized in the tax code. Do you have a younger girlfriend? Adopt her as your daughter. Have a big house? Give the entire mortgage tax deduction to the big earner and call your stay-at-home spouse a “head of household” who has dependents (the kids), and maybe continuing-education expenses.
Hatch and Smith know all the tricks, but they’re getting older. Filing joint federal taxes will cost them thousands because their incomes are so close. On the other hand, the prospect of paying inheritance taxes for their own property, should one of them die, seems ridiculous. And they couldn’t resist the psychological pull of being equal, being married—it gave her “the shivers” in a good way, Hatch says.
I had felt the same way. After the DOMA decision, I felt flush with equality—compelled in a way that sent me back to my undergrad copy of Democracy in America, where Alexis de Tocqueville had written that passion for equality can become “ardent, insatiable, eternal, and invincible.” I wanted to announce to the federal government that mine was a fully legal marriage, one authorized at the Office of the City Clerk in one of its pastel-colored secular chapels. So I told the IRS earlier this year that I was married in 2011, and I refiled my taxes. In my case, because my husband works in the nonprofit art world and there’s a sizable difference in our salaries, I would be getting a check for roughly $3,000 from the federal government and paying $330 to New York State.
Demographers still aren’t clear on how the overall tax bills of gay Americans will be affected by the changes in the law, partly because the population of gay couples hasn’t been rigorously studied. Less affluent gays will likely benefit the most from the DOMA ruling; but if you and your same-sex spouse earn roughly the same, don’t rush to H&R Block (HRB). Hatch was happy for me, but she mutes her democratic exuberance when talking to clients. Recently she helped persuade one couple to wait a year to marry. Both make a lot of money, but one will be quitting next year to raise a child. “It’s going to save them several thousands of dollars to wait just a year,” she says.
And so gay couples slowly begin to see marriage with less exhilaration: It’s a romantic covenant, yes, but it’s also a financial deal that benefits from deliberation.
Brian Moulton, the 34-year-old legal director of HRC, hasn’t proposed to (or received a proposal from) his partner of 10 years. Moulton says that for a lot of gay people, there was an initial sprint to the altar. The DOMA decision, he says, is a call to consider everything marriage means: “It might be less starry-eyed—let’s go do this—and more ‘Hmm, what would this mean for us financially?’ ”
Which makes sense—we all hate the IRS equally. But what about all that sweat that got DOMA overturned? What about the hundreds of protests and petitions and rallies? If we are fighting merely for the right to avoid as many tax bills as straight people, should we be fighting so hard?
What about the hundreds of protests and petitions and rallies? If we are fighting merely for the right to avoid as many tax bills as straight people, should we be fighting so hard?
Perhaps the battlegrounds will shift. As the political and legal barriers to gay marriage fall away, private employers may find themselves under more pressure to compensate gay employees for benefits that went unclaimed while more restrictive laws were in place. Thanks to HRC’s efforts, much of the business community has instituted progressive policies to attract and retain gay workers. By the early ’00s, it had become clear to human resources departments that to compete for gay talent, companies would have to start making up for disparities in how the federal government forced them to treat gay employees in matters such as health insurance.
While I was employed by Time Warner, my husband wasn’t initially covered by the company’s health plan; after he was included, Ihad to pay for Christian’s insurance with after-tax dollars. This cost me $400 a month, or roughly $9,000 during the years I worked there after we were married.
Making a corporate commitment to gay equality is one thing; actually writing checks for thousands of dollars’ worth of retroactive benefits is another. When I called Time Warner for this story, a spokesperson told me that I had been eligible for something called the tax-equalization benefit, a payment that would have reimbursed me for the after-tax money I paid to cover Christian. Many media and tech companies have instituted such benefits to draw gay workers, but I never heard a word about it before I called. It’s how many employee ben-efits work: You may have signed up for reimbursements for your parking expenses, but the company doesn’t feel obligated to remind you to keep claiming them when they’re about to expire.
The question facing businesses is whether they have a special obligation to do more this time—and allow married gay couples to claim any benefits they would have received if they were straight. The uncertain pace of the business response to the Windsor ruling stands in ironic contrast to the immediacy of the IRS response. As Wolfson points out, companies have been put in an awkward position. “Businesses, for a long period, were ahead of the government on these issues,” he says. “Businesses need clarity and consistency. Now it’s very clear where the law and the center of gravity are going for the business world. Now that the law is clear—as clear as the moral answer has always been—companies that had this windfall should make their employees whole.” And those gay employees have to decide what justice means after years of unequal treatment.
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