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New IRS rule raises questions for West Virginia

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Through IRS Revenue Ruling 2013-17, federal tax regulations will affect same-sex couples living in the Mountain State, as well as every other state, regardless of whether the state itself recognizes same-sex marriage.

"In West Virginia, taxpayers file their state returns using the same status as their federal returns," said Brett Hersh, owner of HBS Tax.

Since the scope of the ruling is limited to federal tax purposes, John Hussell IV, managing partner at Dinsmore & Shohl's Charleston office, said Social Security benefits, Medicaid, Medicare and Supplemental Security Income will not be affected and that it should not have a direct impact on a spouse's access to health benefits. The ruling should also allow employers to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex couples. 

However, Hersh points out possible challenges the face might face.

"If same-sex marriage is illegal in West Virginia, the state tax department may face quite a challenge," Hersh said. "On the one hand, if it recognizes the federal filing status, there may be legal challenges. It may also require same-sex couples who were legally married in another state to prepare their federal tax returns twice; once to follow federal rules and once to determine their federal adjusted gross income as an-unmarried individuals. 

"There will also be problems with electronic filing as well as an assortment of pitfalls resulting from any later-amending of a same-sex couple's federal return."  

Hersh said, "Revenue Ruling 2013-17 allows couples that were legally married in a state that allows same sex-sex marriage to file their federal tax returns jointly beginning with tax year 2013. This also applies to couples who were legally married in a state that allows same-sex marriage but who reside in a state that does not recognize such unions."

Hussell said that for federal tax purposes, legally married same-sex couples are considered married for federal tax purposes, even if their home states do not recognize same-sex marriage.

"Accordingly, same-sex couples who were legally married in another jurisdiction and live in West Virginia will be able to file their 2013 federal income tax return using either ‘married filing jointly' or ‘married filing separately' filing status," Hussell said.

Based on the ruling, legally same-sex couples no longer have the option to file as single individuals. If they were legally married in a state that allows same-sex marriage, they must file as a married couple filing jointly or a married individual filing separately. The same federal tax rules that apply to traditionally married couples also apply to legally-married same-sex couples, Hersh explained.

When it comes to gift and estate tax purposes, Hussell said that same sex-couples will also be considered married.

"As a result, many same-sex couples may wish to update their estate planning documents in order to utilize the unlimited marital deduction available under federal law," he said. "This presents a significant opportunity for tax savings for same-sex couples who plan appropriately."

For couples married before this year, Hussell said couples may file amended returns reflecting the change in marital status for the 2010, 2011 and 2012 tax years.

"For federal purposes, this also applies to all returns filed on or after Sept. 16, 2013, including those who have received an extension and have to file their 2012 federal income tax returns," Hersh said. "Same-sex couples who have yet to file earlier-year returns will generally be required to file as married if they file those returns on or after Sept. 16, 2013."

With regards to state income taxes for states not recognizing same-sex marriage, Hussell said it is unknown what the effects will be. 

"For example, a question exists as to whether marital status for purposes of the West Virginia personal income tax return will be different than the marital status claimed on the federal income tax return," Hussell said. "At the very least, the ruling will affect personal and dependency exemptions, the standard deduction, employee benefits, contributions to an IRA, the earned income tax credit, and child tax credit at the federal level, all of which may factor into the calculation of West Virginia income tax liability."

The effects this rule may have on states that do not recognize same-sex marriage are still unclear.

"How this will affect states that do not recognize same-sex marriage, such as West Virginia, has yet to be seen," Hersh said. 

Andrea Lannom contributed to this report.