Comparing the Tax Situations of Iowa and New York Same-Sex Married Couples

This is a tag-along article to this Dinesen Tax Times story about New York issuing guidance to same-sex married couples in that state.  A website visitor asks how New York’s guidance compares to Iowa.

The tax situation of same-sex married couples in New York will be similar to that of Iowans.  They’ll have two filing status options on their federal returns — single or head of household — but will have to file as married on their state return.  This means having to create a mock, joint federal return which is used to prepare the joint state return.  The mock return will have to be based on the federal laws that apply to married couples, which are often different — sometimes in a big way — from the laws that apply to people who are considered unmarried.  On the positive side, New York, like Iowa, will not tax the value of health insurance provided to same-sex spouses.

Neither state imposes a gift tax, but same-sex married couples in both states need to be careful of gifting property to each other, because the federal gift tax could come into play.  Even something as simple as placing the other spouse’s name on the title to a home could constitute a taxable gift in the eyes of the IRS.  The federal gift tax doesn’t apply to married couples, but same-sex married couples are considered legal strangers for federal purposes.

One difference between Iowa and New York is with the estate tax.  No one in Iowa — same-sex married couple or otherwise — has to worry about a state estate tax because Iowa has no estate tax (Iowa imposes an inheritance tax instead).  But as Professor Pat Cain points out, New York does have an estate tax, and same-sex couples there should benefit from having their marriages recognized:

It is worth noting that for estate tax purposes, New York has a lower exemption ($1.0 million) than under federal law (currently $5.0 million). As a result, the availability of the marital deduction at the state level will prove beneficial to many New York estates that are too small to generate federal taxes, but large enough to generate state estate tax liability.

Professor Cain has more coverage of estate tax issues in New York here.  You can find guidance from the New York Department of Revenue here.