Tax Issues for Unmarried Couples

Here's an overview of how being unmarried affects your income taxes.

In most cases, being unmarried does not negatively affect the amount of taxes you pay. In fact, some unmarried couples pay less in federal income taxes than do married couples. In addition, some unmarried partners can claim the other partner as a dependent, which qualifies them for an additional exemption. And when it comes to selling your home, if you and your partner are unmarried and you each own half the home, you can often reap the same tax benefits as married couples, although the eligibility requirements are a little tougher to satisfy.

Common law marriage counts as a real marriage as far as taxes are concerned. If you live in one of the states that recognize common law marriage and you hold yourself out to be married, you are also married for federal tax purposes and should file accordingly. However, if you and your partner live together with no intent to be married, you may (and should) file as single individuals even if you live in a state recognizing common law marriage.

The following discussion focuses on tax issues affecting unmarried couples who are not in a common law marriage.

Tax Rates and the Standard Deduction for Unmarried Couples

For many years, unmarried couples that lived together paid less in federal income tax—often substantially less—than did their married counterparts. This was especially true for higher-income couples. If both people worked, getting married often was expensive. For example, two single wage-earners, each with net taxable income of $50,000 per year, would have been in a 28% tax bracket in 2000. But if these people were married, their combined $100,000 net taxable income would have put them in a 31% bracket.

Compounding this so-called “marriage penalty” was the standard deduction, which disproportionately favored single people. An individual who filed as a single person in 2000 could claim a standard deduction of $4,400 (and two single people living together would get $8,800). The same couple, if married and filing jointly, was entitled to a combined standard deduction of only $7,350.

This discrepancy (why wasn’t the married couple entitled to a standard deduction of $8,800?) didn’t lead to an actual revolt by married taxpayers, but their vocal displeasure eventually brought about some changes, and the marriage penalty was largely eliminated beginning in 2003. This was accomplished by making the standard deduction for married taxpayers exactly twice that of single taxpayers. Lawmakers also widened the 15% tax bracket for married couples. This relief is scheduled to last through 2010 and may be extended.

Social Security Taxes for Unmarried Couples

When it comes to taxing Social Security, the marriage penalty is very much alive and well. Older married couples in which the partners have modest incomes and receive Social Security benefits must pay tax on a portion of their benefits if their “base amount” is more than $32,000. (The “base amount” is the married couple’s combined adjusted gross income, as reported on their tax return, plus interest from tax-exempt investments, plus 50% of their combined Social Security benefits.) In contrast, each partner in an unmarried couple pays taxes on Social Security benefits only if his or her “base amount” is more than $25,000. That would mean that, as a couple, their base amount could be as high as $50,000 before they had to pay taxes on Social Security benefits.

For information on tax rules relating to older people, see IRS Publication 554, Tax Guide for Seniors, available from the IRS website or by calling 800-829-1040.

Dependents and Taxes for Unmarried Couples

In some circumstances, one partner in an unmarried couple can claim a cohabitating partner as a dependent and qualify for an additional exemption ($3,700 in 2011). The IRS defines dependents as either close relatives or unrelated persons who live in the taxpayer’s household as the principal place of abode and are supported by the taxpayer. For more details on these requirements, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information, availble from the IRS website or by calling 800-829-1040.

Claiming Your Partner as a Dependent

Your partner may qualify as a dependent if you provide over one-half of his or her total support (for food, shelter, clothing, medical and dental care, education, and the like) during the year, he or she has earned less than $3,700 in 2011 (not including tax-exempt income, such as welfare or Social Security benefits), and he or she is a U.S. resident or citizen who has lived with you the entire year. In addition, your partner cannot file a joint return with someone else (for example, a spouse if he or she is still married).

Claiming Child Household Members as Dependents

Unmarried partners may also claim “head of household” filing status when they support a dependent other than an adult with whom they are living. So, for example, if your child lives with you and your partner, you could file as head of household and get many of the same credits available to married filers, such as the earned income credit for the working poor, and child and dependent care credits. By filing as head of household, an unmarried taxpayer could claim both the child and the other adult as dependents, for a total of three exemptions.

When parents are divorced or just live apart, the question of who gets to take the dependency exemption for federal income tax purposes often arises. Section 152 of the Internal Revenue Code provides that if the parents were once married, the parent who has physical custody for the greater part of the year gets to claim the exemption. You can change this by waiving your right to claim the exemption in a written agreement (for example, in a divorce, separation, or child custody agreement) or by filing a declaration with the IRS. For more information on how to handle this situation, see IRS Publication 504, Divorced or Separated Individuals, available from the IRS website or by calling 800-829-1040.

If you were never married, the child qualifies by living with you for more than half the year as long as the child didn’t provide more than half of his or her own support.

Income Tax on the Sale of an Unmarried Couple's Home: Capital Gain Exclusion

Current tax law allows married couples to avoid taxes on the first $500,000 of capital gain (usually the difference between the original purchase price and the selling price) when they sell their home, as long as at least one spouse has owned the home, and both spouses have resided in the home, for two out of the five years preceding the sale.

Unmarried individuals are each entitled to a $250,000 gain exclusion on their portion of the home owned with someone else. However, in the case of an unmarried couple, both individuals must have owned and lived in the home for two of the five years preceding the sale.

For more information on the capital gain tax break, see the articles on avoiding capital gains tax in the Real Estate section of this website.

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