Gay 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 $12,970 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 $194,580, 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 1986 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.
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.
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?