Tax Issues for Unmarried Couples

The number of unmarried partners cohabiting has increased over the years. While living with your partner may seem like a great way to reduce expenses, have you considered the possible tax ramifications? Continue reading to learn more.

By , Attorney

Over the past decade, the number of unmarried couples living together has increased dramatically. Some couples are living together to test the waters for marriage, while others may cohabitate to save money or to raise a family without the stress of a wedding. Although there are some perks to living with your partner, you may also encounter financial and tax issues.

Tax Deductions and Credits

When an unmarried couple cohabitates, both partners will need to file an individual tax return at the end of the year. Historically, unmarried couples pay less in taxes because their individual incomes put them into a lower tax rate bracket than if they were married. For example, if both wage earners brought home $30,000 in 2016, they would each qualify for the tax rate of 15%. However, if the couple married and filed a joint tax return, with one spouse claiming head of household, their tax bracket for $60,000 annual income would increase to 25%.

In 2019, the new tax law will take effect, and it drastically changes the above scenario. For an individual earning $30,000 in 2018, the tax bracket is 12%. For a married couple filing jointly, making $60,000, the tax bracket remains 12%, which is a significant difference from years prior.

Unmarried couples may not file a joint tax return. There's a narrow exception if your state recognizes your relationship as a legal marriage. For example, some states recognize common law marriage as a legal status, and if that's the case, you can file a joint state tax return if you meet your state's common law marriage requirements.

If you're in a same-sex relationship or partnership, but you haven't legalized your marriage through your state, you'll need to file individual federal tax returns, because the federal government does not recognize domestic partnerships or civil unions for marital tax benefits. You'll have to check with your state tax department to determine if you can file jointly as a registered couple. For example, in California, registered domestic partners may file joint state returns.

The Child Tax Credit

Unmarried partners may be able to use the "head of household" filing status if they support a child dependent. If your child lives with you and your partner, one of you may file as head of household to claim the child tax credit, but only if you've provided at least 50% of the financial support for the child.

Additionally, you can only claim the credit if your child lived with you for the last six months of the tax year. Married couples filing a joint tax return don't need to make this consideration because they will add the child to the complete tax form and the math will work itself out. That said, in some cases, married spouses with a higher income may not qualify for the child tax credit.

Claiming Your Partner as a Dependent

In 2017, qualified individuals could claim their partner as a dependent if the partner:

  • isn't a "qualifying child" of another taxpayer (such as your partner's parent)
  • earned less than $4,050 in taxable income in 2017
  • did not provide support for themselves, meaning you provided more than half of your partner's financial support for the year, and
  • lived with you all year as a member of your household.

If your partner met the above guidelines, you could take advantage of the dependent tax credit, which could save you up to $4050. However, after the 2018 tax year, the new tax law eliminates the personal and dependent exemption, meaning you can't claim your partner on your tax return. The dependent exemption returns in 2026.

Although the dependent exemption isn't available until 2026, you may be eligible for a $500 (nonrefundable) tax credit for dependents who do not qualify for the child tax credit. The tax credit will reduce your tax burden if you owe money to the federal government, but will not result in a refund credit. This will not be available after 2026.

Property and Mortgage Interest Deduction

Many unmarried couples own a home together, which can sometimes create complications at tax time. If you live with your partner, and the mortgage is in just one partner's name, only the listed partner can claim a deduction for mortgage payments and interest, even if the unnamed partner contributed to or covered the payments.

In one case, an unmarried couple lived in the boyfriend's home. The mortgage was in the boyfriend's name, but both contributed to the household bills, including the mortgage payment. Over time, the couple had a child, and the boyfriend quit his job and became a stay-at-home parent. For four years, the girlfriend paid the mortgage each month. Eventually, the couple added the girlfriend's name to the deed and mortgage.

When the girlfriend claimed the prior four years of mortgage payments and interest on her taxes, the Internal Revenue Service (IRS) rejected her request, stating that she could only receive a credit for the money she paid after she was legally responsible for the mortgage. In this case, the woman was out over $10,000 because she was unmarried and paying someone else's bill. (Wheeler v. Commissioner, T.C. Summary Opinion 2011-83, July 6, 2011.)

Estate and Gift Taxes

Married couples are free to leave their spouse a significant amount of assets without a tax penalty. For example, if spouse A dies and leaves the entire estate to spouse B, spouse B can keep the assets without having to pay any estate tax.

For unmarried individuals, the estate and gift tax exemption applies to property you give away during life or leave at your death. The total amount exempted nearly doubled in 2022, so now, you can gift up to $12.06 million of property tax-free. This exemption amount will increase each year as a result of inflation.

For a detailed explanation, read our article on estate and gift taxes.

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