Tax Challenges For Same-Sex Couples

To date, six states and the District of Columbia recognize same-sex marriage. Seven states allow civil unions or domestic partnerships and provide rights equivalent to spousal rights. Various states recognize 64, 000 same-sex marriages and 175,000 same-sex partnerships. With all of the uncertainties surrounding the tax status of same-sex married couples and partners, same-sex couples will need advice on tax strategies to minimize their tax burdens. The Journal of Accountancy divides areas of concern into six different categories:

1.Income-Splitting and Itemized Deductions – In some community property states, same-sex couples can achieve income-splitting. If the state is not a community property state, then planners should shift income to a lower-bracket return

2. Health Insurance – Self-employed partners can find benefits in this area, but for employees who elect domestic partner benefits offered by their employer, imputed income is subject to tax.

3.Children – Surrogate parenting expenses are not eligible for the adoption credit and are usually only deductible if necessary to overcome infertility. Both partners can use the adoption credit.

4. Retirement Benefits and Transfer Tax Planning – here is no unlimited marital deduction for same-sex couples, so gifts above $13,000 will be subject to gift tax. When a same-sex partner wants to provide for a survivor, a revocable living trust may be the most secure way to do so.

5. Divorce or Termination of Same-Sex Marriage or Domestic Partnership – it is most important to appropriately modify beneficiaries on key assets to minimize estate taxation.

6. Cohabitation Agreement An Option – These agreements fall under contract law and this can help same-sex couples obtain more legal protection of their union.

See Sandy Johns, Advising Clients in Same-Sex Relationships: Tax Issues Present Challenges and Opportunities, Journal of Accountancy, Dec. 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.