SCOTT: As the taxes turn
One of the notable changes in 21st century living is the decline of that classic daytime TV staple: The soap opera. While a few still hold on, many such as “As the World Turns” and “The Guiding Light” have gone the way of the dinosaur. These were longtime favorites of viewers and advertisers, but they are no more.
This scenario can be contrasted with the continually intriguing soap opera that is playing out in the nation’s capital. With its combination of characters and subplots, it is all the rage — and nowhere near dead. Defense of marriage, employer mandate and social welfare — these are the current storylines. The Supreme Court, IRS and Congress — these are the usual actors.
While there are many tax implications to this ruling, they are more easily applied in states that allow same-sex marriage. Those include California (after another 5-4 Supreme Court decision), Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington, as well as the District of Columbia.
In these states, it is clear that same-sex married couples can now file joint returns. They also get such tax benefits as an unlimited estate tax marital deduction, portability of unused estate and gift tax exemptions to a surviving spouse and gift splitting. Spouses will be eligible for tax free employer health coverage, survivor and death benefits under retirement plans and favorable withdrawal rules from such plans, among other items.
But, what about states that define marriage in the traditional sense, like Mississippi?
Here’s where the drama comes in: The IRS has announced that they will be issuing broad-based pronouncements on the DOMA decision soon. Marriage is defined at the state law level, so it would seem logical that state law should be respected in this instance.
Our next plot twist revolves around the employer mandate in health care reform. The Patient Protection and Affordable Care Act was passed and signed into law in March 2010. Most of the major provisions were set to be effective January 1, 2014. This allowed more than three-and-a-half years for the IRS and other agencies to write rules implementing the act.
Just recently, the federal government announced a one-year delay until 2015 for some of the provisions. Most significantly, employer shared responsibility payments were deferred. This employer mandate required employers with at least 50 full-time employees to provide affordable health insurance with minimum essential coverage, as defined. Those who did not were subject to an additional tax of $2,000 or more per year per uncovered employee.
While the explanation was that this delay would help employers, the fact is that many of the rules have still not been written, or have been deemed unworkable and need to be rewritten.
Also, while the employer mandate was deferred, the individual mandate requiring people to have health insurance coverage (or pay a penalty) was not deferred and is still effective for 2014.
This obvious inconsistency, along with the fact that Congress may need to legislatively approve any change to the 2015 effective date of the employer mandate, could lead to another round of court challenges.
Finally, a storyline came to light that the IRS had held up the tax-exempt status of certain “social welfare” organizations. These organizations are defined in the tax code as being exclusively for the promotion of social welfare. However, IRS regulations have always applied a less stringent test by stating the “primary purpose” of the organization must be social welfare.
It now appears that a less generous interpretation was being used to evaluate a number of conservative-leaning organizations applying for tax-exempt status. The result has been congressional hearings, exploring questionable IRS spending and threatening large reductions to the IRS’ budget. That, in turn, would impact the IRS’ ability to write and enforce rules around DOMA and health care.
Are we seeing any pattern in this play? Stay tuned.
John Scott, CPA, is a tax partner at HORNE LLP and has more than 25 years of public accounting experience serving as a tax advisor to corporate, flow-through and individual clients. He has participated in providing value-added tax services to clients including: tax compliance and planning, state and local tax restructuring, IRS practice, acquisition planning and structuring of transactions. John applies his specific knowledge of banking, manufacturing, agribusiness, retailing, real estate, telecommunications, and insurance to bring solutions to his clients.
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