Tax Issues for Same-Sex Couples

If you are part of a same-sex couple, April 15th can be a daunting date. Tax matters that are simple for heterosexual couples can be quite complicated for gay and lesbian couples -- from filling out a federal tax return to determining whether a spouse's health insurance benefits are exempt from taxation. To make matters more difficult, some states recognize same-sex marriages or treat domestic partnerships as marriage-like for tax purposes. Others don't.

Here are the basics of how various states and the federal government treat gay and lesbian couples for tax purposes. But remember, since so many variables can affect your tax liability -- what state you live in, how much money each spouse earns, how big your estate is likely to be upon death, to name just a few -- it's often wise to consult with a tax professional who is well-versed in tax considerations for same-sex couples in your particular state.

Filing Federal Tax Returns

The federal government does not recognize same-sex marriage, so married gay and lesbian couples must file as single people on their federal tax returns. Some experts recommend noting on your tax return that you are, in fact, married, but filed as single due to federal tax law. This might help in other contexts -- like applying for a joint mortgage -- where you want to show that you represent yourself as married.

If you and your spouse have a child, one of you can claim that child as a dependent on your federal tax return. You may also be eligible for the child tax credit ($1,000 if your gross income does not exceed $75,000). If you provide more than 50% of the child's support, you can file as head of household, which usually allows you to pay fewer taxes than if you filed as single. If a couple has two children, each might be able to claim one child as a dependent and file as head of household on their federal tax return. Check with a tax professional to understand your options.

Filing State Tax Returns

If you're part of a same-sex couple, how to complete your state tax return depends on where you live.

Non-Recognition States

If you live in a state that does not recognize same-sex marriages or treat civil unions or domestic partnerships as marriage-like for tax purposes, you and your partner file as single people on both state and federal returns.

Recognition States

It gets trickier if you live in a state that recognizes gay and lesbian marriages or treats those in civil unions or domestic partnerships as spouses for tax purposes. Such states include California, Connecticut, Delaware, the District of Columbia, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New York, Oregon, Rhode Island, Washington State, and Vermont (there may be others -- the law changes rapidly. See Same Sex Marriage: Developments in the Law for updated information). In those states, you must fill out your state tax return as a married couple and follow tax rules that apply to married couples.

But how do you fill out your state return as a married couple when it asks you to plug in numbers from your federal return, which you filed as singles? Tax professionals advise couples to prepare a dummy federal return, filled out as if you were married, and then use those figures to plug into your state return. Once you are done, you toss the dummy return. This significantly increases the time and money that gay and lesbian couples must spend on preparing tax returns, because they must prepare three federal returns (two separate single returns and one dummy joint return).

Beware the Gift Tax

Heterosexual married couples are exempt from almost all federal taxes that are levied on transfers of property or money between them. Not so for gay and lesbian couples, since their marriage is not recognized by the federal government. This means that same-sex couples must be aware of federal gift tax rules.

What is the gift tax? Every person may give a lifetime total of up to $5.25 million (for 2013) without tax penalty. Once you surpass that limit, all further gifts, and anything you leave at death, are taxed. Annual gifts of $14,000 or less per recipient do not count towards this lifetime total. Heterosexual spouses are exempt from this tax -- they can give any amount to each other and it doesn't count as a gift. But gifts between same-sex couples do not qualify for this exemption. (To learn more about how the gift tax works, see Nolo's article Estate and Gift Tax FAQ.)

How might this affect gay and lesbian couples? If you make taxable gifts of more than $5.25 million, you will have to pay taxes on any future gifts. This tax can be hefty -- nearly 40% of the amount of the gift -- and wealthy same-sex couples may be at risk of having to pay it. You can also rack up the dollar amounts if you put your partner on the title to your home without receiving payment. The federal government considers this to be a gift of half the value of your home, and this amount will count towards your lifetime gift total.

Planning for the Future -- Estate Taxes

The federal government imposes estate tax at your death only if your property is worth more than $5.25 million in 2013. However, all property left to a heterosexual spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Same-sex couples do not qualify for this exemption, an issue that is currently being challenged in federal court. If you leave a large estate to your same-sex spouse when you die, your spouse may have to pay a bundle in estate taxes. Be sure to talk to a tax professional about legal ways to avoid this. (To learn more about how estate taxes work, see Nolo's Estate Tax area.)

Taxes on Employment Benefits

When an employee, their heterosexual spouse, and their children receive health benefits through a job, the value of those benefits is exempt from tax by the federal government. However, if that employee is able to secure health benefits for a same-sex spouse or domestic partner, the federal government requires that the employee spouse report those benefits as taxable income.

These are just a few of the tax issues that affect same-sex couples. To learn more about tax and estate planning considerations for same-sex couples, get Making It Legal: A Guide to Same-Sex Marriage, Domestic Partnership & Civil Unions, by Frederick Hertz and Emily Doskow (Nolo).