State Income Tax Uncertainty Remains for Same-Sex Couples Receiving Employee Benefits

Despite the Internal Revenue Service’s (IRS) recent guidance on the federal tax treatment of married same-sex couples, taxpayers and employers have many unanswered questions regarding their tax treatment under state law. In the guidance, the IRS stated it would treat married same-sex couples as married for purposes of federal tax law even if they resided in a state that does not recognize same-sex marriage. For more on the guidance, see Dykema Alert Federal Tax Guidance for Same-Sex Couples and Employee Benefit Plans. While the IRS guidance creates consistency for federal tax purposes, employers with same-sex married couples living in one of the thirty-five states that restrict marriage to one man and one woman, may have inconsistent and disparate treatment of employee benefits between federal and state law. For a list of same-sex marriage and non-recognition states, see the Human Rights Campaign Statewide Marriage Prohibitions.

For example, some states may continue to impute state income tax on the value of employee health benefits available to legally married same-sex couples residing in a state that does not allow same-sex marriages, even though those benefits are excluded from federal taxes.  It all depends on the definition of income for state tax purposes.  There is a range of cohesion between federal and state tax law. Some states follow the federal definition of income.  Other states either deviate from the federal definition or carve out specific exceptions to the federal rules.  For example, Michigan does not recognize same-sex marriages, but it generally follows federal tax law to define taxable income, unless a certain item is carved out and thus required to be added back into income for Michigan tax purposes.  At this time, Michigan law does not expressly require that the value of same-sex spousal benefits be added back into state taxable income.  Accordingly, Michiganders have a good-faith basis to follow federal treatment of excluding married same-sex employee benefits under Michigan’s income tax until such time as Michigan announces a contrary rule.  Note, however, that the Michigan Department of Treasury recently announced that same-sex married couples filing a federal joint return must continue to file income tax returns for Michigan with each individual using the single filing status.

To address the uncertainty created by the lack of state guidance, Dykema attorneys have analyzed same-sex marriages and imputed income in each state. For more information on the likely state income tax imputation consequences of same-sex marriage employee benefits, please contact Amy M. Christen (achristen@dykema.com or 248-203-0760) or any of the Employee Benefits and Tax attorneys listed to the left, or your Dykema relationship lawyer.

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