Important Tax Tips for Gay & Lesbian Partners and Unmarried Couples

gay coupleGay marriage, though legal in a number of states, is not recognized by the Federal Government. This means, among a whole host of other issues, that same-sex couples do not enjoy the same tax breaks as married heterosexual partners in the United States.

As frustrating as that may be, the good news is there are still ways you can lower your tax bill come the tax filing deadline. And this advice isn’t great just for same-sex partners – any unmarried,  financially interdependent couple can benefit from the following tips.

Ways to Reduce Your Tax Burden

1. Allocate Dependents Wisely
Do you have children that you support jointly? The higher-earning partner gets a bigger tax break by claiming head of household filing status and claiming the child or children as dependents. Keep in mind that the IRS does not allow you to take your partner’s children as your own unless they qualify as your dependents. So if the child belongs biologically or legally to only one partner, the other partner must provide almost all of the child’s support in order to claim him or her as a dependent. If the child has both partners listed as parents on the birth certificate or adoption record, either partner can claim the child as a deduction if providing support.

Also, you can “assign” the children as dependents to either partner, as long as you are both working and are both listed as parents. This comes into play when one partner makes very little income and thus doesn’t owe much in taxes – for example, if one partner is a stay-at-home parent. In other words, there’s no sense in “wasting” the deduction from claiming a dependent when that partner would pay little tax anyway. But on the flip side, because the child care tax credit begins to phase out at an income of $75,000, it may make sense for a higher-earning partner to forgo the credit and pass it to the other parent if his or her income is too high to take it.

Remember, you need to have children at home to file as head of household. So if you have a stay-at-home partner and no minor children, you should both file as single.

2. Take Advantage of Mortgage Interest Deductions
You may be able to split the mortgage interest deduction if you are both listed on the mortgage and both pay money toward it, or you can allot to one partner (the partner listed as primary payer on the mortgage) the entire mortgage interest deduction. However, the IRS expects the partner to whom Form 1098 is issued to deduct mortgage interest. If the other partner wishes to deduct the interest instead, or a portion of it, contact a CPA for direction. For example, one partner may be able to benefit from the entire mortgage interest deduction and itemize other deductions, such as charitable contributions, while the other partner takes the standard deduction. The way in which you jointly own property may also affect how you can allot the mortgage interest deduction.

3. You Can Get Double the Home Sale Exclusion on Capital Gains
Another nice bonus is that if you sell a home that you and your partner owned jointly, you can each take the $250,000 exclusion on capital gains. So if you made $600,000 in profit on your home, together you can exclude $500,000 from capital gains tax and only owe tax on $50,000 each.

4. Don’t Forget Your Adoption Credits
You can receive a credit of up to $13,190 in expenses for each child that you adopt, and this amount can be split between partners if you both contributed to the adoption expenses and are both listed as adoptive parents. Since this credit begins to phase out at a modified adjusted gross income (MAGI) of $197,880, unmarried partners generally can take more of this credit than couples who file jointly.

5. Name Each Other as Beneficiaries
While married spouses are generally able to transfer retirement assets between themselves with no or few issues, more is often required of unmarried spouses, which makes it vital to designate your partner as beneficiary on your accounts.

Beneficiary information is especially important to complete for unmarried couples, as retirement accounts can go to probate after the account holder dies without a will or any beneficiaries listed, and this rarely comes out in favor of the surviving partner. Also, make sure to review your beneficiaries periodically on all accounts. The beneficiary you listed in 1987 will still receive the contents of your IRA if you pass away today without changing it. For all estate concerns, contact an estate planner to discuss your particular situation.

tax time
6. Take Precautions Against the Gift Tax
Couples who have one high earner and one low earner may run into issues of gift tax if the high earner actually transfers money to the low earner, even if it is for household expenses that are mutually beneficial, such as groceries or home improvements. The annual gift tax exclusion is $14,000, which means as long as you remain below this threshold, you won’t be taxed on the amount transferred. Be aware if you have a joint bank account that money the high earner deposits and the low earner takes out may be considered a gift. In such cases, it may be simpler for the high earner to make the majority of mutually beneficial purchases, or at least make the more expensive ones.

Final Word

While filing taxes can be more challenging for gay and lesbian couples, with a little effort, you can still take advantage of various tax breaks and not have to pay so much to Uncle Sam.

What have been some of your biggest challenges when it comes to taxes as part of a same-sex partnership?

  • Glenn Galang

    Hello – I’m curious when this was posted and if it applies to the 2010 taxes. The reason I ask is the recent change in how the IRS requires same-sex married couples to file in community property states and states where marriages are legal.


  • curious gay couple

    I have a follow-up question to #3: Does the same tip apply to the property tax deduction? Can we allocate all of it to one partner and have the other partner take the standard deduction?

    • Kira Botkin

      Yes, if you don’t have any specific ownership percentage set up for the property, you can allocate it as you see fit. But if you have paperwork showing you each own 50% or what have you, each of you can only take 50%.

  • Nilywily

    Thanks for the great info! Its difficult to find DP tax info. I have a question…I file as head of household and my partner stays home with our two children. All three are my dependents. In 2011, my partner adopted our children legally as 2nd parent adoption. I paid “her” fees of $1000 to adopt as a 2nd Parent. Since she is my dependent, can I claim her adoption fees on my tax return? She does not file. Thanks, Lynn and my partner’s name is Sharon

    • Kira Botkin

      Yes, I would think that should be fine – it might be a different story if she paid and you were trying to claim it, but I don’t see any issue with you taking the deduction when you paid the fees.

  • Nepenthe326

    Ugh! The mortgage is in Jeff’s name. Jeff is disabled, does not work. His partner Bob claims him as a dependant. Mortgage payments come from a joint bank account that Bob contributes to. There is a home equity loan that are in both names, proving Bob has an ownership interest. There is legal right of survivorship paperwork filed with the state. Can Bob claim mortgage interest on his federal tax returns?

    • Kira Botkin

      Unfortunately no, if Jeff is the only one on the mortgage, he’s the only one who can claim the mortgage deduction. Having a loan in your name does not give a co-signer any rights whatsoever over the property used as collateral – ask anyone who’s ever stupidly co-signed a car loan for a relative who ran off with the car and left the co-signer with the loan. The only way to prove Bob has an ownership interest is to actually put Bob on the title. But that won’t help Bob unless Bob is on the mortgage.

      Jeff should probably sell the house to Bob, or refinance the mortgage with Bob as a co-signer and putting Bob on the title.

  • S

    Someone might want to update this…