Giant tax headaches for gay couples
Jan. 8th, 2008 08:44 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
transpaoGiant tax headaches for gay couples
Some states allow same-sex partners to file joint returns, but because the U.S. government doesn't, tax season for gays means additional paperwork and lots more time-sapping computations.
By MarketWatch
The tax rules for same-sex marriages, civil unions and domestic partnerships are fraught with complications -- and expense.
The 2000 U.S. census counted more than a million people in the U.S. who were part of same-sex couples (those who were willing to say so in census forms), according to data analyzed by GayDemographics.org. About 21% lived in states that today have laws for gay couples on the books, and some of those states allow same-sex partners to file joint tax returns.
California's recently expanded domestic-partnership law gives the largest population of same-sex couples in the country access to a sort of matrimonial tax recognition, according to GayDemographics.org.
In 2004, Massachusetts became the only state with legal same-sex marriage. A same-sex couple files a joint tax return in that state, just as any heterosexual couple would. But complications arise when it's time to prepare an Internal Revenue Service tax return, says Shari Levitan, an attorney and partner in Holland & Knight's Boston office. The federal government doesn't recognize same-sex couples, so each taxpayer must file as single.
To file jointly at the state level, that couple would have to prepare four tax returns, says Debra Neiman, a certified financial planner in Arlington, Mass., and a co-author of "Money Without Matrimony."
The couple would prepare a joint state return and a "dummy" joint federal return for the Massachusetts Department of Revenue -- because the state return is based on the joint federal return -- and then two individual returns, prepared as single filers, to actually send to the IRS.
If a tax preparer was hired, the couple would pay for four tax returns. But sometimes costs go even higher, with tax preparation for same-sex couples running double the price of two single returns. Neiman deplores the extra cost, but there is so much extra time involved that there's no way to avoid it, she said.
Why the extra time?
Levitan and Neiman explain that completing these returns is not like pushing a button. You have to devote time to separating income from joint assets, such as bank accounts, businesses and securities sales. You must split up expenses, such as medical insurance, mortgages, property taxes and business expenses. And then there are the children. How do you go about equitably splitting a child? You need the wisdom of Solomon not to alienate and anger one of the partners. Often, the child is related by blood to a partner who is not producing income.
This creates problems with dependency exemptions, earned-income credits, child-care credits, student-loan deductions and more. The Massachusetts Department of Revenue site details some special provisions that apply to same-sex couples. (Visit the Web site.)
California more complex than most
In California, where the first same-sex tax returns will be filed in 2008, Lynn Freer, the president of Spidell Publishing in Anaheim, is pushing for legislation to get the California Franchise Tax Board to allow registered domestic partners (RDPs) to file the same joint tax returns that married couples file.
Under current law, when a registered couple file jointly in California, they have to make several adjustments to their joint return based on two federal single returns. Freer says some of the rules are still unclear. For instance:
Federal rental losses are limited to $25,000 per joint tax return or per single tax return. Will California use the combined $50,000 ($25,000 times 2) loss on the RDP return? Or just the federal joint limit of $25,000?
What if one person has a capital loss of $100,000 but the other has a capital gain of $100,000? Will they be allowed to net the losses, or will they pay tax on the gain but not benefit from the loss?
If one owns a home for two years and then the couple sell it, will California grant them each a $250,000 exclusion from the gain? Or just the one owner that the IRS would allow?
And so it goes. In all other states that allow joint tax returns, same-sex couples follow the same rules as heterosexual couples within the state.
The combination of elements from the two single returns will generally result in higher joint taxable income on the California Form 540 than the couple would have paid using a dummy federal joint return. For anyone, even a tax professional, preparing the California version of the RDP joint return requires a specialized checklist of line items to change, combine or eliminate. No other state has made joint filing this complicated.
Across state lines
If you got married in Massachusetts and moved to California, will California recognize your marriage for tax purposes? No. California hasn't legalized same-sex marriage.
However, if you have a registered domestic partnership in another state, California will honor that relationship and allow you to file jointly. Couples married in Massachusetts would have to register as domestic partners in California to have the same privilege.
You can split your refund and have some go to your retirement or vacation accounts, or go toward hamburger debt.
States with domestic partnerships and civil unions have reciprocity with each other. But if you move, it's worth checking the state laws to find out whether you may file a joint return.
Investments are another concern when moving. If you have income from investments -- such as real estate, partnerships or S corporations -- in a state that doesn't recognize your marital status, you may find yourself filing a joint return in your state, separate returns for federal purposes and separate returns in the other state, too.
Are there tax advantages to filing jointly?
Logically, if one member of the couple works and the other doesn't, it would drop their combined incomes into a lower tax bracket. Right? Well, when it comes to state tax rates, they hit the highest brackets pretty quickly. So, except perhaps in New Jersey and Vermont, you're in the top bracket long before you reach the federal poverty levels, as the chart below shows.
Individual income-tax rates for places with same-sex tax laws:
Location Effective date Type of union Joint tax return Highest tax rate; income level at which it applies*
California
Jan. 1, 2007
Domestic partner
Yes
9.3%; greater than $43,467
Connecticut
April 20, 2005
Civil unions
Yes
5%; greater than $10,000
District of Columbia
2002
Domestic partner
Yes
9%; greater than $30,000
Hawaii
July 8, 1997
Reciprocal beneficiary
No
8.25%; greater than $40,000
Maine
July 30, 2004
Domestic partner
Yes
8.5%; greater than $18,250
Massachusetts
May 16, 2004
Marriage
Yes
5.3%; flat rate
New Jersey
Feb. 19, 2007
Civil unions/RDP
Yes
8.97%; greater than $500,000
Vermont
Dec. 20, 1999
Civil unions
Yes
9.5%; greater than $336,500
*Source: Tax Foundation
So, the decision to file jointly wouldn't be based on the savings from lower tax brackets. But when one partner works and brings home the proverbial bacon, and the other owns the home and has all the mortgage and property-tax deductions, suddenly, by filing jointly, you can itemize your deductions for state purposes.
For the IRS, if the income producer pays the mortgage and property taxes but isn't named on the mortgage, you've just lost the entire mortgage deduction. Why? The person who made the payments isn't entitled to the deductions, and the partner who is entitled to the deductions didn't make the payments. So no one gets to deduct the mortgage interest for IRS purposes.
Without extensive planning on how to pass along funds to each other, how to gift money or property to one another and what legal documents, promissory notes and liens to file, same-sex couples may find themselves facing tax comas at the end of the year.
Divorce disasters
As if divorce weren't already bad enough, just wait until you see same-sex couples in Massachusetts deal with dissolving civil unions or registered domestic partnerships, or getting divorced. Conventional couples may split the home and other assets without any tax consequences. Same-sex couples? Let's look at a pretend couple, Jack and Jim.
Jim originally bought the home. Jack partnered with him. In the split, the court gave Jack half the house. This may work fine for the state. But, as Spidell Publishing's Freer notes, to the IRS this is either a gift (which may involve gift taxes being due) or compensation for services rendered (which would be taxable to Jack).
Let's look at alimony. Jim is ordered to pay Jack $2,000 a month in support. So the state lets Jim deduct $24,000, but the IRS won't, as they weren't married for federal purposes. To the IRS this is a gift or further payment for services rendered.
What about Jack? It's unclear whether he picks this up on his federal return as alimony income, other income, self-employment income or something else.
And Neiman, the certified financial planner, brings up QDROs -- qualified domestic relations orders -- that allow a couple to split up pensions without early-withdrawal penalties or immediate tax assessments. When it comes to same-sex couples, they won't qualify for the special treatment provided by the tax code.
When judges deal with these dissolutions, attorney Levitan says, they have neither the experience nor the responsibility to ensure there is an equitable tax split. It's up to the lawyers to prepare their cases with the help of tax and financial professionals who understand all the implications.
Julie and Hillary Goodrich, one of the couples in Massachusetts whose landmark case is responsible for gay marriage, separated amicably in July 2006, according to an article at GayWired.com. No divorce is on the horizon. Perhaps their advisers looked at the potential tax nightmare that a divorce would cause and decided to wait this one out.
You can split your refund and have some go to your retirement or vacation accounts, or go toward hamburger debt.
Many experts agree that when it comes to taxes, getting married or registered poses too many challenges. Suzanne Durbin, a senior adviser at GV Financial Advisors in Atlanta, says same-sex couples who don't get married or registered enjoy distinct advantages. Her strategy works for couples who plan to stay together for the long term, when one is wealthy and the other is not. Durbin takes full advantage of the limits of gift-tax and estate-tax laws.
For instance, usually when someone passes a share of a home or business property to a spouse or child, the appraiser discounts the value of the asset -- that is, sets it lower than fair market value -- because only part of the property is transferred. The IRS tends to insist on very conservative discounts when the transfer is between family members. But since a same-sex couple isn't married in the eyes of the IRS, the discounts on the valuations may be more aggressive. As far as the IRS is concerned, these are transfers to unrelated parties, so there's no need to look so closely. As a result, more property can be transferred to your spouse without triggering tax consequences.
Same-sex couples face so many tax complications that you could fill a book with them. In fact, it's so complex that producers of income-tax software don't write software to handle the computations. So tax professionals must make the adjustments by hand.
We've barely tickled the surface of the inequities in the income-tax, estate and inheritance laws. Freer predicts that as tax and divorce cases involving same-sex couples hit the courts over the next few years, the legislation will evolve to define tax guidelines for couples that don't qualify for marriage in the eyes of Uncle Sam.
This article was reported and written by Eva Rosenberg for MarketWatch.
Some states allow same-sex partners to file joint returns, but because the U.S. government doesn't, tax season for gays means additional paperwork and lots more time-sapping computations.
By MarketWatch
The tax rules for same-sex marriages, civil unions and domestic partnerships are fraught with complications -- and expense.
The 2000 U.S. census counted more than a million people in the U.S. who were part of same-sex couples (those who were willing to say so in census forms), according to data analyzed by GayDemographics.org. About 21% lived in states that today have laws for gay couples on the books, and some of those states allow same-sex partners to file joint tax returns.
California's recently expanded domestic-partnership law gives the largest population of same-sex couples in the country access to a sort of matrimonial tax recognition, according to GayDemographics.org.
In 2004, Massachusetts became the only state with legal same-sex marriage. A same-sex couple files a joint tax return in that state, just as any heterosexual couple would. But complications arise when it's time to prepare an Internal Revenue Service tax return, says Shari Levitan, an attorney and partner in Holland & Knight's Boston office. The federal government doesn't recognize same-sex couples, so each taxpayer must file as single.
To file jointly at the state level, that couple would have to prepare four tax returns, says Debra Neiman, a certified financial planner in Arlington, Mass., and a co-author of "Money Without Matrimony."
The couple would prepare a joint state return and a "dummy" joint federal return for the Massachusetts Department of Revenue -- because the state return is based on the joint federal return -- and then two individual returns, prepared as single filers, to actually send to the IRS.
If a tax preparer was hired, the couple would pay for four tax returns. But sometimes costs go even higher, with tax preparation for same-sex couples running double the price of two single returns. Neiman deplores the extra cost, but there is so much extra time involved that there's no way to avoid it, she said.
Why the extra time?
Levitan and Neiman explain that completing these returns is not like pushing a button. You have to devote time to separating income from joint assets, such as bank accounts, businesses and securities sales. You must split up expenses, such as medical insurance, mortgages, property taxes and business expenses. And then there are the children. How do you go about equitably splitting a child? You need the wisdom of Solomon not to alienate and anger one of the partners. Often, the child is related by blood to a partner who is not producing income.
This creates problems with dependency exemptions, earned-income credits, child-care credits, student-loan deductions and more. The Massachusetts Department of Revenue site details some special provisions that apply to same-sex couples. (Visit the Web site.)
California more complex than most
In California, where the first same-sex tax returns will be filed in 2008, Lynn Freer, the president of Spidell Publishing in Anaheim, is pushing for legislation to get the California Franchise Tax Board to allow registered domestic partners (RDPs) to file the same joint tax returns that married couples file.
Under current law, when a registered couple file jointly in California, they have to make several adjustments to their joint return based on two federal single returns. Freer says some of the rules are still unclear. For instance:
Federal rental losses are limited to $25,000 per joint tax return or per single tax return. Will California use the combined $50,000 ($25,000 times 2) loss on the RDP return? Or just the federal joint limit of $25,000?
What if one person has a capital loss of $100,000 but the other has a capital gain of $100,000? Will they be allowed to net the losses, or will they pay tax on the gain but not benefit from the loss?
If one owns a home for two years and then the couple sell it, will California grant them each a $250,000 exclusion from the gain? Or just the one owner that the IRS would allow?
And so it goes. In all other states that allow joint tax returns, same-sex couples follow the same rules as heterosexual couples within the state.
The combination of elements from the two single returns will generally result in higher joint taxable income on the California Form 540 than the couple would have paid using a dummy federal joint return. For anyone, even a tax professional, preparing the California version of the RDP joint return requires a specialized checklist of line items to change, combine or eliminate. No other state has made joint filing this complicated.
Across state lines
If you got married in Massachusetts and moved to California, will California recognize your marriage for tax purposes? No. California hasn't legalized same-sex marriage.
However, if you have a registered domestic partnership in another state, California will honor that relationship and allow you to file jointly. Couples married in Massachusetts would have to register as domestic partners in California to have the same privilege.
You can split your refund and have some go to your retirement or vacation accounts, or go toward hamburger debt.
States with domestic partnerships and civil unions have reciprocity with each other. But if you move, it's worth checking the state laws to find out whether you may file a joint return.
Investments are another concern when moving. If you have income from investments -- such as real estate, partnerships or S corporations -- in a state that doesn't recognize your marital status, you may find yourself filing a joint return in your state, separate returns for federal purposes and separate returns in the other state, too.
Are there tax advantages to filing jointly?
Logically, if one member of the couple works and the other doesn't, it would drop their combined incomes into a lower tax bracket. Right? Well, when it comes to state tax rates, they hit the highest brackets pretty quickly. So, except perhaps in New Jersey and Vermont, you're in the top bracket long before you reach the federal poverty levels, as the chart below shows.
Individual income-tax rates for places with same-sex tax laws:
Location Effective date Type of union Joint tax return Highest tax rate; income level at which it applies*
California
Jan. 1, 2007
Domestic partner
Yes
9.3%; greater than $43,467
Connecticut
April 20, 2005
Civil unions
Yes
5%; greater than $10,000
District of Columbia
2002
Domestic partner
Yes
9%; greater than $30,000
Hawaii
July 8, 1997
Reciprocal beneficiary
No
8.25%; greater than $40,000
Maine
July 30, 2004
Domestic partner
Yes
8.5%; greater than $18,250
Massachusetts
May 16, 2004
Marriage
Yes
5.3%; flat rate
New Jersey
Feb. 19, 2007
Civil unions/RDP
Yes
8.97%; greater than $500,000
Vermont
Dec. 20, 1999
Civil unions
Yes
9.5%; greater than $336,500
*Source: Tax Foundation
So, the decision to file jointly wouldn't be based on the savings from lower tax brackets. But when one partner works and brings home the proverbial bacon, and the other owns the home and has all the mortgage and property-tax deductions, suddenly, by filing jointly, you can itemize your deductions for state purposes.
For the IRS, if the income producer pays the mortgage and property taxes but isn't named on the mortgage, you've just lost the entire mortgage deduction. Why? The person who made the payments isn't entitled to the deductions, and the partner who is entitled to the deductions didn't make the payments. So no one gets to deduct the mortgage interest for IRS purposes.
Without extensive planning on how to pass along funds to each other, how to gift money or property to one another and what legal documents, promissory notes and liens to file, same-sex couples may find themselves facing tax comas at the end of the year.
Divorce disasters
As if divorce weren't already bad enough, just wait until you see same-sex couples in Massachusetts deal with dissolving civil unions or registered domestic partnerships, or getting divorced. Conventional couples may split the home and other assets without any tax consequences. Same-sex couples? Let's look at a pretend couple, Jack and Jim.
Jim originally bought the home. Jack partnered with him. In the split, the court gave Jack half the house. This may work fine for the state. But, as Spidell Publishing's Freer notes, to the IRS this is either a gift (which may involve gift taxes being due) or compensation for services rendered (which would be taxable to Jack).
Let's look at alimony. Jim is ordered to pay Jack $2,000 a month in support. So the state lets Jim deduct $24,000, but the IRS won't, as they weren't married for federal purposes. To the IRS this is a gift or further payment for services rendered.
What about Jack? It's unclear whether he picks this up on his federal return as alimony income, other income, self-employment income or something else.
And Neiman, the certified financial planner, brings up QDROs -- qualified domestic relations orders -- that allow a couple to split up pensions without early-withdrawal penalties or immediate tax assessments. When it comes to same-sex couples, they won't qualify for the special treatment provided by the tax code.
When judges deal with these dissolutions, attorney Levitan says, they have neither the experience nor the responsibility to ensure there is an equitable tax split. It's up to the lawyers to prepare their cases with the help of tax and financial professionals who understand all the implications.
Julie and Hillary Goodrich, one of the couples in Massachusetts whose landmark case is responsible for gay marriage, separated amicably in July 2006, according to an article at GayWired.com. No divorce is on the horizon. Perhaps their advisers looked at the potential tax nightmare that a divorce would cause and decided to wait this one out.
You can split your refund and have some go to your retirement or vacation accounts, or go toward hamburger debt.
Many experts agree that when it comes to taxes, getting married or registered poses too many challenges. Suzanne Durbin, a senior adviser at GV Financial Advisors in Atlanta, says same-sex couples who don't get married or registered enjoy distinct advantages. Her strategy works for couples who plan to stay together for the long term, when one is wealthy and the other is not. Durbin takes full advantage of the limits of gift-tax and estate-tax laws.
For instance, usually when someone passes a share of a home or business property to a spouse or child, the appraiser discounts the value of the asset -- that is, sets it lower than fair market value -- because only part of the property is transferred. The IRS tends to insist on very conservative discounts when the transfer is between family members. But since a same-sex couple isn't married in the eyes of the IRS, the discounts on the valuations may be more aggressive. As far as the IRS is concerned, these are transfers to unrelated parties, so there's no need to look so closely. As a result, more property can be transferred to your spouse without triggering tax consequences.
Same-sex couples face so many tax complications that you could fill a book with them. In fact, it's so complex that producers of income-tax software don't write software to handle the computations. So tax professionals must make the adjustments by hand.
We've barely tickled the surface of the inequities in the income-tax, estate and inheritance laws. Freer predicts that as tax and divorce cases involving same-sex couples hit the courts over the next few years, the legislation will evolve to define tax guidelines for couples that don't qualify for marriage in the eyes of Uncle Sam.
This article was reported and written by Eva Rosenberg for MarketWatch.
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2008-01-09 10:36 pm (UTC)Of course this is the same government the continues the War on Drugs so never mind.
no subject
Date: 2008-01-10 01:50 am (UTC)I say that the govment has no right giving out marriage licenses in the first place due to marriage having such a religious conotation. I say you give out Civil Unions to everyone (of a certin age, where both parties consent) and let churchs decided who's married and who isn't.
And yes the drug war is 'tarded. I'm not really a user myself... tried something but usually we didn't mix well... but prohabition doesn't work. I say legalize it all and start regulating and taxing it. Though I'm not sure how the FDA and the American Medical Association feel about it. Probably it would have to be something similar to the way we handle alcohol and ciggaretts, though half the bloody country wants to ban smoking unless you are 9'8 and only wear one shoe.