Nebraska Department of Revenue Releases Revenue Ruling, FAQs Addressing State Tax Implications of Same-Sex Marriages
Pursuant to the United States Supreme Court’s decision in United States v. Windsor that overturned the Defense of Marriage Act’s definition of “marriage” as a legal union between one man and one woman for purposes of all federal laws, the Nebraska Department of Revenue has released guidance for individuals and employers on how, if at all, the Court’s decision in Windsor affects Nebraska tax law and state income tax filing requirements.
Windsor Effect on Nebraska State Tax Law, Imputation of Income for Employer-Provided Health Coverage to Same-Sex Spouse
Historically, Nebraska’s state tax laws have generally conformed to federal tax laws in most respects, meaning that individuals and employers could look to federal tax law in most instances to determine how and when to file their returns. Pursuant to the Court’s decision in Windsor, however, the IRS expanded its definition of marriage to include same-sex marriages for federal tax law purposes. Because of Nebraska’s constitutional ban on same-sex marriage, the changing federal tax law implications of the Windsor decision left many Nebraska individuals, employers and practitioners scrambling to reconcile the state’s mirroring of federal tax law with its overriding constitutional mandates.
To bring clarity to these issues, the Nebraska Department of Revenue issued Revenue Ruling 22-13-1 in late October of 2013. In its Revenue Ruling, the Department of Revenue stated that individuals in same-sex marriages who file taxes in the state of Nebraska must continue to file separate state income tax returns, use a single or, if qualified, head of household filing status, and utilize the state tax rates that correspond to the single or head of household filing status, whichever applies. The Revenue Ruling indicated that its ruling applies to all previous, current and future tax years. Amended tax returns to change an individual’s status for previously filed returns will not be allowed for state tax purposes in the same manner in which such amended returns are allowed for federal tax purposes.
Additionally, in a set of Frequently Asked Questions issued in the wake of Revenue Ruling 22-13-1, the Department of Revenue further confirmed that, unlike under federal tax law, an individual filing Nebraska tax returns may not add his or her same-sex spouse to employer-provided health insurance plans without having to impute taxable income for such coverage. Thus, the employer is required to report imputed income on the value of such coverage for Nebraska tax purposes on such employee’s Form W-2, Wage and Tax Statement. The amount to be imputed as income to the employee is equal to the fair market value of the employer-provided health insurance benefit as determined by the employer and the insurance provider, and such amount must be reported on box 16 and box 18 of the employee’s Form W-2 for reporting of state and local wages, respectively. Such amounts will be subject to Nebraska state income tax withholding.
Retroactive Employment and Income Tax Considerations for Federal Tax Returns
Despite the Nebraska Department of Revenue’s ruling that same-sex marriages will not be recognized for state tax purposes, employers and employees may still nonetheless file amended federal returns or claims for credit or refund of the overpayment of employment or income withholding taxes with respect to employer-provided health coverage or fringe benefits that are generally excludable from income based on an individual’s marital status. However, amended federal returns or claims for credit or refund can only be retroactively filed for tax years that are still open for assessment (generally, 2010, 2011, 2012, and 2013, depending on statute of limitation rules applicable under the Code). For example, an employee who elected a pre-tax salary reduction for health coverage under the employer’s cafeteria plan in 2011 and who also elected to provide coverage to the employee’s same-sex spouse on an after-tax basis may treat the amounts paid on an after-tax basis as pre-tax reduction amounts for federal tax purposes.
Last fall, the IRS issued simplified procedures pursuant to IRS Notice 2013-61 which employers may use to correct overpayments of federal employment taxes, such as FICA and federal income tax withholdings, for prior years that are still open for correction. For overpayments of FICA taxes relating to prior years, Form 941-X may be filed with respect to the fourth quarter of each prior year to correct any overpayments, and such form will apply to all four quarters for that year. Forms W-2c must also be filed to correct information previously reported on that year’s Form W-2. Any excess federal income tax withholding for prior years for which a Form W-2c is issued must be corrected by employees on their individual federal tax returns.
Employer Action Plan
In lieu of the conflicting treatments of same-sex marriages for income tax purposes, Nebraska employers should be cognizant of the differing tax rules that currently apply at the state and federal levels and take care to correctly and uniformly apply such rules. Additionally, Nebraska employers should take extra precautions in order to correctly impute income from employer-provided health coverage to same-sex spouses on their applicable employees’ Form W-2s. Lastly, despite Nebraska’s constitutionally-mandated refusal to recognize same-sex marriage for state tax purposes, Nebraska employers and employees may nonetheless still take advantage of the IRS’s relief with regard to filing amended returns to change individual filing status for certain prior years with respect to their federal tax returns.