Same-Sex Marriage, IRAs and After-Tax Basis

This is another installment of my “Life After DOMA” series on the tax aftermath of the US Supreme Court’s ruling that struck down the Defense of Marriage Act.

Today I want to blog about individual retirement accounts and after-tax basis.

This is another area where the tax implications are clear for 2013 and future years but not-so-clear in prior years.

What is After-Tax Basis in an IRA?

Deposits made into an IRA are typically deductible, up to certain dollar limits each year (for 2013, the limit is $5,500 if you’re under age 50, or $6,500 if you’re over age 50).

But deposits into an IRA are not deductible if your income is above certain levels. It also depends on if you’re covered by an employer-provided retirement plan. I won’t get into all the details in this post. This page on the IRS website contains more details.

If you put money into an IRA and those deposits end up not being deductible, you have after-tax basis in your IRA.

How Does This Affect Same-Sex Married Couples?

The income levels where IRA deposits become non-deductible vary depending on marital status.

Remember that, prior to 2013, couples in same-sex marriages were prohibited from filing their federal taxes as married, but were required to file their state taxes as a married couple.

So a person in a same-sex marriage who made deposits into an IRA would have needed to apply two different sets of law, and potentially track two different sets of basis (one for federal purposes and one for state purposes).

But That Was Old Law — What Happens Now That DOMA is Dead?

It’s clear that for 2013 and going forward, couples in same-sex marriage will only need to apply “married person” rules to IRAs (and to everything else relating to their taxes).

What’s less clear is what happens with differences between federal and state basis for prior years.

Here’s what I think:

  1. If the person decides to amend prior-year returns, their basis would be adjusted.
  2. If the person chooses not to amend, then the discrepancies in basis from those prior years would remain

For couples facing this situation, the answer to the question of “should they amend to fix the difference in basis?” is “it depends.” They would need to look at their total tax picture