When Two Partners Are Committed, It’s Time to Think About … Taxes!
Money is part of every couple’s journey from first kiss to final shared moments, whether finances and taxes are shared, separate, discussed or avoided.
If a straight couple is married as of Dec. 31 of any given year, the couple is subject to the benefits (and restrictions) of the tax rules for married couples. Most straight married couples file a joint federal return, a joint return for the state in which they live, and additional state returns (usually joint) for any other states in which either spouse has worked, lived, or owned income-producing property that year.
For gay and lesbian married couples, taxes aren’t that simple. A joint federal return is not allowed, thanks to the Defense of Marriage Act, so two federal tax returns are required for most couples. In states that recognize same-sex marriages or civil unions, the two federal returns usually are combined to prepare a joint state tax return.
A Kansas couple that travels to Iowa for their nuptials, returning to Kansas to live and work, will not file an Iowa tax return. (OK, they might if they own income-producing real estate or work in Iowa.) They will file separate federal returns and separate Kansas returns. Depending on their situation, they may each file using the single filing status, or one may file as head of household.
Some married gay and lesbian couples pay higher taxes than straight spouses with similar finances and families, and others pay less tax. In addition to the need to prepare and file additional taxes, the opportunity to make choices, weigh options, and document expenditures complicates the tax preparation process. For federal taxes, spouses use the same planning techniques as unmarried couples.
If one spouse has less than $3,650 of income (the amount of the personal exemption, which changes from year to year), he or she can be claimed as a dependent of the other spouse. To be claimed as a dependent, the couple must have lived together the entire year and the spouse with more income must have provided more than half the support for the other spouse.
A spouse who supports the family may also be able to deduct the medical expenses of the other spouse, even if income is more than $3,650. To deduct medical expenses, the supporting spouse must itemize deductions and all medical expenses for the family must be more than 7.5 percent of income.
Tax planning usually suggests that the spouse with the lower income will get more benefit from deducting the medical expenses because lower income means it’s easier to reach the 7.5 percent threshold. The household can come out ahead with the supporting spouse deducting the expense if the spouse with less income isn’t able to itemize or has income low enough to pay little or no tax.
Married gay and lesbian couples with children face a complex set of rules, and the tax benefits related to children can be significant. Claiming a child as a dependent gives the taxpayer an additional $3,650 deduction plus, for some, the $1,000 child tax credit, a credit for child-care expenses, and an earned-income tax credit. Combined, these tax benefits can save a taxpayer with one child more than $4,000 in federal taxes.
A taxpayer’s biological child or adopted child can be claimed on the federal tax return if that child lived with the taxpayer for more than half that year. Whether any other child can be claimed on the federal return depends on the law in the state where the taxpayer lives.
New York, for example, recognizes same-sex marriages entered into outside of New York, although the state does not allow same-sex marriage within its own boundaries. New York law also recognizes the spouse of a married woman as the parent of any child born to that woman during the marriage. A married lesbian couple living in New York with a child born to the couple in New York will have a birth certificate for the child recognizing both women as the parents of the child. Married gay men don’t have the same recognition in New York and must complete a formal adoption procedure.
In both Kansas and Missouri, a gay or lesbian parent must be either a biological or an adopted parent to be recognized as the child’s parent. A married same-sex parent may claim an adoption credit for the cost of adopting his or her spouse’s child; a married straight couple would not be able to claim the adoption credit.
A spouse supporting a child that is not recognized by the state as that taxpayer’s child may still claim the child as a dependent, but may not use the head of household filing status or claim tax credits related to that child. When both spouses are recognized as parents of the child, either may claim the child as a dependent on the federal return.
If the parent who provides more than half the household support also claims the child as a dependent, he or she may also file as head of household. A married straight couple would not be able to file as head of household unless they lived apart for the last half of the year. A taxpayer filing as head of household will pay less tax than a taxpayer with the same income filing as single. With careful planning and recordkeeping, finances can often be arranged and expenses paid to ensure that more than half the household support will be paid by the spouse who will get the bigger tax savings.
Tax laws are complex and ever-changing, filled with opportunities and potential pitfalls. Although same-sex couples can’t share a joint federal tax return even if married, they can work together to benefit from savings hidden within the tax code.
Kathy Burlison, EA, helps her clients figure out the tax consequences of their decisions at SmartSpot in Prairie Village, Kan. She can be reached at firstname.lastname@example.org.