- quote -

Interesting. Do you suppose this analysis is
Massachusetts-specific or does Massachusetts believe that it
is following federal rules? If the latter, this seems
contradictory to the conclusion (supported by some
convincing references, if I recall correctly) of a recent
discussion here. Wasn't the conclusion that the "monetary
contribution" test was a special case for financial accounts
and that it did not apply to real property? That is (absent
a few special circumstances that would pull the whole
property back into the estate), adding a joint tenant to a
property created a completed gift at the time of title
change, removing the gifted fraction from the estate and
making it ineligible for basis step up.

Dan Lanciani
ddl[at]danlan.*com

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For those who may have to deal with it

Technical Information Release 04-17
Massachusetts Tax Issues Associated with Same-Sex Marriages

Beginning May 16, 2004 Massachusetts law permits same-sex
couples to be married. Goodridge v. Department of Public
Health, 440 Mass. 309 (2003). Same-sex spouses will file as
married persons, jointly or separately, for Massachusetts
state income tax purposes.

Federal law does not recognize same-sex civil marriage, and
same-sex spouses will remain individual filers for federal
purposes. Where elements of Massachusetts taxation derive
from federal law, such as the definition of gross income, or
state deductions that are based on a federal counterpart,
same-sex spouses may need to perform special calculations to
arrive at the proper Massachusetts tax figure. This
technical information release discusses these tax issues.1

A. General Issues

1. Differences between Massachusetts and federal law with
respect to same-sex marriage.

a. The definition of marriage and spouse under Massachusetts
law.

Massachusetts construes the term civil marriage "to mean the
voluntary union of two persons as spouses . . . ." See
Goodridge v. Department of Public Health, 440 Mass. 309, 343
(2003). Thus the term "marriage" includes same-sex
marriage, and the term "spouse" includes partners in a
same-sex marriage. The Supreme Judicial Court stayed the
entry of judgment in Goodridge for 180 days; thus same-sex
marriage is recognized in Massachusetts on May 16, 2004.
Id., at 344. Marital status is usually determined as of
the close of the taxable year and applies for the entire
taxable year. See G.L. c. 62, § 1(g). Massachusetts will
recognize valid same-sex marriages for taxable years that
end on or after May 16, 2004, and will not recognize
same-sex marriages for taxable years that end before May 16,
2004.

b. The federal Defense of Marriage Act

The terms "marriage" and "spouse" differ in meaning between
Massachusetts and federal law. Federal law states that:

In determining the meaning of any Act of Congress, or of any
ruling, regulation, or interpretation of the various
administrative bureaus and agencies of the United States,
the word "marriage" means only a legal union between one man
and one woman as husband and wife, and the word "spouse"
refers only to a person of the opposite sex who is a husband
or a wife.

1 USCS § 7 (2004).

2. Return filing requirement of spouses in a civil marriage.

For federal purposes, spouses in a same-sex marriage file
either as single filers, or as head of household. See 1
USCS § 7, I.R.C. § 6012. See also I.R.S. Pub. 501. For
Massachusetts purposes, same-sex spouses have the option of
filing either a Massachusetts joint return or a married
filing separate return. Cf. G.L. c. 62C, § 6. Note that
same-sex spouses who file as head of household federally
will generally not be eligible to file as head of household
for Massachusetts purposes. The term "head of household" as
used in Massachusetts derives from the federal definition,
which generally allows the status only for unmarried people.
See G.L. c. 62, § 3(A)(b), I.R.C. § 2(b). Since the
spouses are married under state law, applying the federal
definition renders them generally ineligible for head of
household status.2

3. A note on statutory construction.

Under the statutory construction provisions of the General
Laws, "words of one gender may be construed to include the
other gender and the neuter." GL. c. 4, § 6, cl. 4. In
interpreting Massachusetts tax laws, the Department will
construe all references to "husband" and "wife" as "spouse,"
and pronouns as representing either gender.

B. Specific income tax issues for taxpayers

General note: same-sex spouses preparing Massachusetts
joint returns will be combining figures from their separate
federal returns.

1. Number of dependents. Same-sex joint filers will
combine the number of dependents from their federal returns
to arrive at the number of Massachusetts dependents. See
G.L. c. 62, § 3(B)(a)(8). If one spouse does not claim a
personal exemption with his or her own employer, the other
spouse is permitted to submit Form M-4, "Massachusetts
Employee's Withholding Exemption Certificate," claiming a
spousal exemption for Massachusetts withholding purposes.

2. Differences between state and federal deductions for
same-sex joint filers.

a. Medical/dental expenses. A taxpayer may deduct from
Part B Adjusted Gross Income (AGI) the full amount of the
deduction for medical, dental and other expenses allowed
under I.R.C. § 213, namely medical and dental expenses that
exceed 7.5% of federal AGI. G.L. c. 62, § 3(B)(b)(4). See
I.R.C. § 213. Same-sex joint filers will recalculate their
combined allowable expenses as appearing on Federal Form
1040, Schedule A, 3 under the heading "Medical and Dental
Expenses," combining their AGIs to use in performing the
7.5% calculation.

b. Allowable unreimbursed business expenses and certain
miscellaneous deductions. A taxpayer may deduct from Part B
gross income trade or business and certain other expenses as
allowed under I.R.C. § 162, namely expenses that exceed 2%
of federal AGI. See G.L. c. 62, § 2(d)(1), (2). See also
I.R.C. § 62(a). Massachusetts uses this as a starting point
for calculating its own deduction. See G.L. c. 62, §
2(d)(1), (2). Same-sex joint filers will recalculate their
combined allowable expenses as appearing on Federal Form
1040, Schedule A, under the heading "Job Expenses and Most
Other Miscellaneous Deductions,"4 combining their AGIs to
use in performing the 2% calculation, and will complete the
worksheet in the Form 1 instructions.5

c. Student loan interest deduction. Massachusetts allows
as an option the federal "interest on education loans"
deduction. G.L. c. 62, § 2(d)(1). The federal deduction
phases out based on modified AGI. I.R.C. § 62(a)(17), §
221. Same-sex joint filers must use the "Student Loan
Interest Deduction" worksheet in the instructions to Federal
Form 10406 or 1040A7 making sure to combine their income
figures, and performing the calculation as though they were
filing a joint federal return.

Note: the separate Massachusetts undergraduate student loan
interest deduction at G.L. c. 62, § 3(B)(a)(12) is not tied
to the federal deduction and calculating it will be the same
for same-sex spouses and opposite-sex spouses. It is not
phased out based on AGI amount.

d. Passive activity losses from rental real estate.
Massachusetts taxpayers are allowed to deduct passive
activity losses to the extent they are allowed under I.R.C.
§ 469. See generally G.L. c. 62, § 2, TIR 89-2.8 The
federal limitation favors single filers over married filers
because federal law provides the same offset limitation and
AGI threshold for reducing the offset limitation to married
couples that it provides to single filers. Two single filers
are eligible for twice the benefit of a married couple.
Same-sex joint filers should use Federal Form 8582 to
recalculate their loss limitations as though they were
filing a joint federal return.

e. Line 12, Dependent care expenses. Massachusetts allows
taxpayers a deduction for employment related expenses that
exceeds the federal deduction on which it is based. G.L. c.
62, § 3(B)(a)(7). Same sex joint filers will complete a
pro forma U.S. Form 2441 or U.S. Form 1040A, Schedule 2. In
addition to changing the maximum amount of the deduction
allowed on the federal form (as required by the instructions
to the Massachusetts Form 1), same-sex spouses will prepare
the pro forma federal forms as though they were filing a
joint federal return.

C. A sales and use tax issue

Massachusetts provides a sales and use tax exemption for the
purchase of a motor vehicle, trailer, boat, or airplane by
the spouse of the seller, with certain restrictions. G.L.
64I, § 7(b). This exemption extends to same-sex spouses.

D. Employer obligations

1. Employee benefits.

a. General rule.

Because federal law does not recognize same-sex marriage,
the taxability of employee benefits will differ for federal
and state tax purposes in some cases. Certain benefits that
are tax-exempt when extended to opposite sex spouses and the
children of opposite sex spouses will be taxable federally
when they are provided for same-sex spouses and their
children, unless the same-sex spouse or the children qualify
as dependents under I.R.C. § 152.9 See, e.g., 1 USCS § 7
(2004), I.R.C. §§ 105, 106, 117, 125, 132. For
Massachusetts tax purposes, if an employee benefit is
tax-exempt when extended to the opposite sex spouse of an
employee, or to the children of the spouse, the benefit is
tax-exempt when extended to a same-sex spouse or his or her
children.

b. Specific examples of benefits that have different
treatment under federal and state law.

(i) Employer provided health insurance and other benefits,
under I.R.C. § 106.

Certain employer-provided benefits that extend to spouses,
such as health insurance benefits, are excluded from gross
income federally. I.R.C. § 106. However, the fair market
value of benefits provided to same-sex spouses that do not
qualify as dependents under I.R.C. § 152 is included in
gross income and is taxable federally to the spouse who
receives the benefit from his or her employer. I.R.C. §
61(a)(1), Treas. Reg. § 1.61-21(a)(4), (b)(1). The fair
market value of such benefits is excluded from gross income
for Massachusetts purposes.

(ii) Cafeteria plans under I.R.C. § 125.

Employees are often allowed a variety of benefits under
I.R.C. § 125, known as cafeteria plans. In general,
employee contributions to these plans are tax-exempt.
I.R.C. § 125(a). A common benefit allows employees to pay a
portion of their health insurance coverage on a pre-tax
basis. If the benefit extends to same-sex spouses that do
not qualify as dependents under I.R.C. § 152, however, the
employee contribution attributable to the spouse is taxable
for federal purposes. This employee payment is excluded
from gross income for Massachusetts purposes.

(iii) Qualified tuition reduction.

Federal gross income does not include the value of qualified
tuition reduction offered employees and their spouses by
undergraduate educational institutions. I.R.C. § 117(d).
The value of this reduction must be added to gross income
federally when extended to domestic partners. See I.R.C. §§
117(d), 132(h). For Massachusetts purposes, the value of
the reduction is excluded from gross income when the benefit
is extended to same-sex spouses.

2. Employer withholding issues.

Generally, income is subject to Massachusetts income tax
withholding if it is taxable under Massachusetts personal
income tax law and if several other conditions are met. 830
CMR 62B.2.1(3)(a). The value of spousal benefits that are
tax-exempt for opposite-sex spouses under federal law are
also tax-exempt for same-sex spouses under Massachusetts
law, and are not subject to withholding for state income tax
purposes. This rule applies both to employer-provided
benefits and to tax-exempt employee contributions
attributable to a same-sex spouse or the children of a
same-sex spouse. Employers should report the reduced
Massachusetts income figure on the wage statement the
employer furnishes the employee by January 31.10 See 830
CMR 62B.2.1(5)(d). This requirement supersedes in part the
general rules with respect to withholding on fringe benefits
found in 830 CMR 62B.2.1(11).

E. Estate Tax Issues

Massachusetts imposes a tax on the transfer of the estates
of individuals who, at the time of death, were residents of
the Commonwealth, or were non-residents who owned real
property situated in the Commonwealth or tangible personal
property having an actual situs in the Commonwealth. The
tax is a so-called "sponge tax" and is computed using the
amount of the credit for state death taxes allowable to a
decedent's estate as computed under I.R.C. § 2011, as in
effect on December 31, 2000.

The estate of a single taxpayer may be subject to estate tax
in Massachusetts if the value of the decedent's gross estate
exceeds $850,000 for a death occurring in 2004. The gross
estate includes all property in which the decedent had an
interest. For any jointly owned property, the full value of
the jointly owned property is included in the estate of the
first-to-die joint tenant unless the surviving joint owner
can prove monetary contribution to the acquisition of the
jointly owned property. Joint property owned by a husband
and wife is not subject to this contribution test. Instead,
fifty percent of the value of the jointly owned property is
included in the estate of the first-to-die spouse.

Since the federal Defense of Marriage Act prevents
recognition of same-sex marriages, the contribution test
will apply to jointly held property for federal, but not
state, purposes. As a result, computation of the proper
amount Massachusetts estate tax due will require preparing a
pro-forma federal estate return as if the same-sex marriage
were federally recognized.

F. Gifts

Section 2513 of the Code allows a gift made by one spouse to
be considered as made one-half by the donor and one-half by
the spouse for gift tax purposes. Massachusetts does not
have a gift tax, but this section can affect certain related
estate tax provisions, such as the filing threshold. Spouses
in a same-sex marriage who elect to have a gift of one
spouse considered as made one-half by each spouse for
calculating their Massachusetts estate tax obligation must
file a pro forma federal gift tax return (either Form 709 or
Form 709-A) in accordance with I.R.C. § 6075(b). Taxpayers
should mail the form to the following address:

Massachusetts Department of Revenue
Attn: Estate Tax Unit/Gift Tax Section
200 Arlington Street, Room 4300
Chelsea, MA 02150-2312

/s/Alan LeBovidge
Alan LeBovidge,
Commissioner of Revenue

AL:LEM:dt
173316

July 7, 2004

TIR 04-17
1. This TIR discusses only federal and Massachusetts
differences that affect Massachusetts income tax
calculations, or an employer's withholding responsibilities.
There may be other benefits of federal law, tax and
otherwise, that are granted to spouses but will be denied
same-sex spouses. Individual federal agencies are the proper
authorities to give guidance on matters that do not affect
Massachusetts taxation.

2. Certain married people who live apart from their spouse
may be able to use the head of household status. See I.R.S.
Publication 501, "Exemptions, Standard Deduction, and Filing
Information." If allowed federally, this status is allowed
for Massachusetts purposes. G.L. c. 62, § 3(A)(b).

3. Currently Form 1040 (2003), Schedule A, Lines 1 - 4.

4. Currently Form 1040 (2003), Schedule A, Lines 20-22.

5. Currently Form 1 (2003), Schedule Y, Line 1.

6. Currently Form 1040 (2003), Line 25.

7. Currently Form 1040A (2003), Line 18.

8. For special rules that apply to real estate
professionals, see TIR 98-15 IV.H, I.R.C. § 469(c)(7).

9. Note that the benefits described in this technical
information release are generally not taxable under federal
law when extended to dependents under I.R.C. § 152. A
domestic partner or his or her children may qualify as
dependent if he or she: (1) receives more than half of his
or her support from the taxpayer, and (2) has the home of
the taxpayer as his or her principal place of abode and is a
member of the taxpayer's household during the entire taxable
year of the taxpayer. I.R.C. § 152(a)(9). The individual
is only considered a part of the taxpayer's household if the
relationship does not violate local law. I.R.C. §
152(b)(5). The I.R.S. has allowed an employer to rely on
an affidavit from an employee stating that a domestic
partner qualifies as a dependent under I.R.C. § 152(a)(9)
and 152(b)(5). See Priv. Rul. 200339001 (June 13, 2003).

10. Currently federal Form W-2, box 16, "State wages, tips, etc."

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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