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Tax Answers for Same Sex Couples

Wednesday, March 30, 2011

Gay Pride Rainbow Flag Gay Pride Rainbow Flag (marlith/flickr)

With the tax filing deadline approaching, Tina Salandra, CPA and principal at Numerical, LLC, offers advice for LGBT families on how to prepare their tax returns.

Fifty states, two levels of government, an incredibly complex tax code—you'd be hard-pressed to find a more tangled case study of bureaucracy than in the challenges that same sex couples face every April.

Filing income taxes at the state and federal levels gets tricky for a couple that isn't legally allowed to marry everywhere, and whose legitimate marriage in one state isn't grounds for recognition from the national government. Though President Obama recently ordered the Justice Department not to defend the Defense of Marriage Act (DOMA), the law stands, and will remain standing until it's successfully challenged in court. That means that for the time being, a homosexual couple wed in Vermont still can't file their federal income taxes as a married couple, even though they're allowed to file their state taxes that way.

What's more, the variety of partnership allowances for gay couples further complicates the matter. Certain states (California, New Jersey, Oregon) have banned same sex marriage in favor of civil unions and domestic partnerships, but still allow those couples who were joined in another state to file their state taxes as a unit. Then there's New York, which doesn't allow gay marriage, but recognizes and extends marriage rights to gay couples from out of state—then still doesn't let them file together.

"New York state has not changed any of their tax laws relevant to same sex couples, at least not for the 2010 filing season." said Tina Salandra, a CPA with experience filing same sex tax returns. For tax purposes, married gays in the state of New York aren't married at all. Contrast that with New Jersey's example: Salandra says the state actually requires every couple in a civil union to file as married; they don't even have the option to file single, as they're required to for their federal return.

"You either file 'married/civil union' or 'married filing separately/civil union filing separately," she explains. "It's actually neutral for the family bottom line."

What do same sex couples need to know as they prepare to file their state taxes?

The first step is to double check your state tax laws regarding same sex partners. The most obvious consequence of being allowed or forced to file together is that a couple's combined income could bump them into a collectively higher tax bracket than the one in which either individual would otherwise land—the "marriage penalty," as it's known.

That can only happen to gays at the local level, in states that permit joint filing. But Tina Salandra said that ultimately, a couple's state tax return isn't going to look remarkably different whether they file separately or not.

"States have such a narrow range of tax brackets—let's say five to nine percent—that there often isn't the same disparity for filing single or married as there is with federal tax return," she said. The difference gets more pronounced at the national level, where there's a wider range of tax rates.

How can these couples better manage their money to come close to the same deal heterosexual marriages enjoy?

Salandra fielded several questions regarding specific situations and provisions in the federal tax code. Right off the bat, gay couples shouldn't even think about filing their federal taxes jointly; fraudulent statements constitute a felony. For the finer points of financial maneuvering, here's what Salandra had to offer:

→ If you co-own property, can both homeowners get the mortgage interest deduction?

You can both get the mortgage interest deduction so long as you are both legally liable for the mortgage debt. You can allocate that interest any way you like within couple: split it 100-0, 90-10, 60-40, etc.

→ What if one partner stays home with child while other works? in a marriage, working spouse can take a dependent deduction for stay-at home spouse. can one aprtner be deemed as dependent?

Possibly. A partner can be deemed a "dependent other" if the working partner and taxpayer provides more than 50 percent of their support and the nonworking partner earns less than $3,650—the dependent exemption. That figure doesn't just have to be wage income; it includes interest, dividends, capital gains; none of that can exceed $3,650.

→ Could a same sex couple form an LLC, or incorporate legally, and then file corporate taxes? Treat your relationship as a business?

That's a very complex question, and depends on a lot. You can certainly form a corporation and put your jointly held assets in there, but some other complexities that could be negative. I wouldn't be able to answer that without knowing a lot of other information.

→ What if one partner makes more than the other, but it all goes into the same pot? Do you have to worry about the $13,000 gift tax limit?

There's a temporary tax law in place that allows a lifetime exemption of $5 million through the end of 2013. That's a new law that came into play January 1, 2011. That's an opportunity I see for same sex couples to gift half an apartment that one owned before they got together, half a brokerage account, etc., to make things a little more level in the relationship.

→ It's too late to change aspects of co-ownership or financial responsibilities for their 2010 return, but what can people do in the coming year to make it easier to file their 2011 taxes?

They should combine their assets legally, make sure they're both on the deed of their home and liable for the mortgage, and should have joint bank accounts. Likewise, if possible in the state they're in, if they have children, they should make sure to both be legal parents, whether they're adopted or biological.

However and wherever you file, tax day is April 18th this year. Same sex couples with questions can turn to specialists like Lambda Legal, Salandra's Numerical LLC, and the planning firm Christopher Street Financial.

We also invite readers to keep leaving questions in the comments section below. We'll get back to you with answers from a tax specialist in the coming days.

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Tina Salandra

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Comments [6]

mary m .andres

If you get married in the latter months of a year are you responsible for imputed income for any or part of that year for your now spouse formerly domestic partner. Since you are required by law to file as married for the whole year it seems that it would apply for that also. Very confusing but have HR with my former company looking into it. I am retired from AT&T.

Feb. 21 2014 04:16 PM
Kim from Guttenberg, NJ

I'm retired from a NY company which provides medical insurance for my partner. He's not my dependent. We live in NJ. I know I have to pay federal income tax on the amount on the 1099-Misc but do I owe tax on it to NY (my only taxable "income" in that state) and/or to NJ (where our Canadian marriage is recognized as a civil union)?

Apr. 06 2011 10:19 AM
gluten free chocolate from UK

tax prices are according to the income of an individual.What is the criteria of paying tax for same sex couple.

Mar. 31 2011 03:41 AM
Whitney Weddell from Bakersfield

What about IRS form 555?

Mar. 30 2011 10:14 PM
ana from brooklyn

my partner gets health insurance through my work and my company adds imputed income for the value of the insurance. I claim her as a dependent, however, so I should not be taxed on that income. How do I deduct this from my gross income on my tax form?

Mar. 30 2011 10:54 AM
Jason from Brooklyn

Tax time is when I can put an actual price on discrimination. It's about $1200, the extra amount of taxes my partner owes for including me on his health insurance. Do we still owe it now that DOMA is no longer being defended?

Mar. 30 2011 10:39 AM

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