Tax Tips for Gay Couples

tax tips for gay couples

Even if you're legally married, federal tax law doesn't recognize your marriage.

There’ve been a lot a changes this past year with some states legalizing gay marriage, some authorizing civil unions, and of course the end to “Don’t Ask Don’t Tell” in the military.  But despite all these changes, US federal tax law still does not recognize gay relationships in tax law.  Even if you’re in a state where your marriage rights are fully recognized, you’ll still be considered unmarried for federal tax purposes and social security benefits.  These tips are for couples who are legally married, or would be legally married if they lived in a state that allows gay marriage. 

There are two main issues here that you have to deal with.  The first is working to reduce your current tax liability and the second is to ensure that you’ve got sufficient coverage for both of your retirements.  To that end, you need a tax professional and a financial advisor that can sit down with you and your partner to develop some long term and short term strategies.  Right now, if you’re thinking, “I’d never even tell my tax guy I’m gay,” then it’s time to hire a new advisor. 

Couples where both partners earn wages and have similar incomes:  are pretty straight forward for tax purposes.  You can both take advantage of IRA contributions, you’ll both receive equal social security benefits from your wage earning, you won’t lose any tax benefits from the married filing separately status, and your tax rates will be fairly comparable to folks filing as married.   In this situation, many couples just split everything evenly and that’s a pretty fair arrangement.  But, it may make sense to load all of the deductions onto one partner and let the other partner take the standard deduction. 

For example:  let’s say that Jen and Gina together would have itemized deductions of $13,000 a little more than the $11,400 they would claim as a standard deduction if they could file as married.  Filing as single they can each claim a standard deduction of $5,700.  If they’re splitting the itemized deductions, they can each claim a deduction of $6,500.  But, if we load all of the deductions onto Jen and have Gina claim the standard deduction, then together they’d have a combined deduction of $18,700 and that would save them a substantial amount of money.

Now, remember, it’s not that perfectly even.  In most cases, part of the $13,000 would be state income tax, you can’t load that onto your partner’s return, but with planning, you can put your mortgage, real estate tax, and charitable contribution deductions all on one person and enjoy a substantial tax savings.

Couples where there is self employment income:    The biggest tax issue facing sole proprietors is paying the self employment tax.  If you’re already in the 25% income tax bracket, and you add that 15% self employment tax to that, then you’re paying 40% tax on your income.  Anything you can do to reduce your self employment tax is a good thing. 

One possibility is to hire your partner as an employee.  This in itself doesn’t really eliminate your self employment tax as you’re just shifting it to your partner and paying the employer’s share.  But, hire your partner and provide health care benefits and now you’ve got something.  For example:  let’s say Jack and Dean have been together for 10 years.  Jack has modest income from a part time job but spends a lot of time helping Dean with his small business as a professional entertainer.  Dean is fairly successful and averages about $100,000 a year in income.  Jack books appointments for Dean and makes sure that Dean is where he needs to be at all times.   If Dean were to have to hire someone to do Jack’s job, he estimates that it would easily cost him $15,000 or more.  So instead, he hires Jack as an employee.  Instead of taking a salary of $15,000, Jack chooses a smaller wage but wants health insurance benefits.  Because Jack would be Dean’s only employee, Dean can afford to have his employee package include health insurance benefits.  And, more importantly, Dean could provide a health care plan that covered Jack’s partner (which happens to be Dean.)  Now Jack and Dean have just excluded all of their health care costs from self employment tax. 

Here’s why:  Health care benefits reduce the employer’s taxable income.  Health care benefits are not included in the employee’s taxable income.  It’s a win/win situation for both of them. 

Everyone’s tax situation is unique and the laws keep changing so you have to stay on top of things.  Right now though, with the tax laws as they are, doesn’t it make sense to take advantage of them instead of letting them take advantage of you?

9 thoughts on “Tax Tips for Gay Couples

  1. I was reading a blog by R&G Brenner Income Tax Consultants and I found two really good tips: 1. married couples should keep their assets jointly, that way you can shift income to the lower income partner and expenses to the higher income partner on your separate federal returns. 2. Employer based health insurance for same sex spouses is not tax exempt like it is for heterosexual couples. It must be reported as income on the W2. If you want to see the rest of the blog, I included a link: http://www.linkedin.com/news?viewArticle=&articleID=914768413&gid=42838&type=member&item=80567202&articleURL=http%3A%2F%2Fwww%2Ergbrenner%2Ecom%2Fblog%2F2011%2F11%2F15%2Fsame-sex-couples-face-tax-hurdles%2F&urlhash=lOKj&goback=%2Egde_42838_member_80567202

  2. Despite the recent announcement that the Justice Department will no longer defend the constitutionality of the Defense of Marriage Act (DOMA) the IRS is still bound by DOMA’s requirements. That said, things may bode differently in the future. This link is to a rather thoughtful article about some of the potential issues ahead, court cases in progress, and even some possible tax return strategies. It’s worth a look: http://images.magnetmail.net/images/clients/NAEA/attach/TNT_tax_law_for_domestic_partners.pdf

  3. Today, January 31, 2011, the governor of Illinois signed into law the bill authorizing civil unions in Illinois. It will go into effect on June 1, 2011. On the state level, the law grants all rights and responsiblities of married couples to couples in a civil union. This still does not effect federal tax issues.

  4. Another update from the IRS for California, Washington, and Nevada: you still must split your income according to community property law rules. They’re only expanding the filing statuses for the sake of people with children.

  5. News update from the IRS: Effective February 14, 2011, Registered Domestic Partnerships in the Community Property States of California , Washington and Nevada can e-file a Community Property Form 1040 Return with the filing statuses of Single, Head of Household or Married Filing Separate.

    Currently, Registered Domestic Partnerships in these states could efile a community property 1040 return with the filing status of married filing separate.

  6. I received a phone call today about this post and I just want to clarify something. If you own a small business and hire your partner, the job has to be a real job for the business. You can’t just employ your partner to “clean the house” or some other domestic chore. It has to be legitimate work for the company in order for this to be a legitimate deduction.

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