Are Same-Sex Married Couples Always at a Tax Disadvantage?

July 22, 2011 by  Filed under: Taxes 

In June 2011, New York State joined other states in having marriage equality rights that permit for same-sex marriages. The New York State Senate passed the same-sex marriage bill into state law. The recognition of same-ex marriages comes with quite some advantages for the affected couples. However, one of the advantages that the same sex couples in New York will still not enjoy is the IRS’s tax benefits for married couples. This is because U.S. Federal law does not recognize same-sex marriages. According to the Defense of Marriage Act (DOMA), the Federal law only recognizes a marriage as a union between people of different genders. Therefore, same-sex couples will still have to file tax returns as singles since their marriages are not recognized by the Federal law. This means that these couples will have to forfeit about 1,138 provisions in the tax code available to married couples according to a 2004 Government Accountability Office (GAO) report.

The provisions of the DOMA have been a point of controversy and debate for many years now. There have been various lawsuits that have been filed to challenge the legality of the DOMA; these suits are pending in court in which case, the Department of Justice is expected to defend the DOMA Federal law against the charge that it is unconstitutional. However, the Department of Justice has stated that the DOMA cannot be defended, leaving conservatives in Congress with the task of privately supporting this law in court. Besides these legal pursuits against the DOMA, there are also other same-sex activist groups that are stirring members to declare that they are legitimately married in their tax returns and “refuse to lie.”

However, in spite of the aggressive activism that is pushing towards recognition of same-sex marriages, filing jointly for the couples may not necessarily be advantageous. There are many tax circumstances that filing as singles or as head of households that will place the same-sex couples at an advantage over heterosexual couples. Some of these advantages are:

  • Marriage Penalty – The table for the tax rates of those that file jointly is less than doubled that of those that file as singles. Therefore, if two singles earn incomes at the same tax bracket, chances are that their tax bracket will shift upwards if they file jointly. This is especially significant for spouses that both earn high incomes.
  • The Unrelated Individual Advantage – Since the same-sex married couples remain as strangers in the eyes of the Federal government, they can take advantage of this and process various transactions for tax purposes that would otherwise be unacceptable for married heterosexual couples. These transactions include selling a house from one spouse to another and claiming the first-time homebuyer credit, and the sale of a depreciated car at a loss to avoid paying back depreciation deductions, among other transactions. You can also pay one of the spouses a wage for child care and claim it in your tax return due to the “unrelated” factor.
  • Joint Responsibility – When a married couple files jointly, they are both held responsible for any tax liabilities that may arise from the return. This means that if one party has tax liabilities, both spouses are held responsible for these taxes. This can be really disadvantageous for the spouse not responsible for the liability. However, when a same-sex couples file as singles, they avoid such implications.
  • Tax Saving Situation – The tax code is very punitive to married couples who choose to file separately. However, singles do have relatively good tax opportunities. In some cases, the “single” filing can lead to some tax savings. If one spouse has huge capital gains and the other, huge capital losses, as opposed to canceling off these capital gains, one spouse will use the loss against tax liabilities while the other will get taxed at the lower capital taxation rate. The net effect will be a tax savings if filed as singles as opposed to jointly as a married couple.
  • Head of Household Advantage – If you are a married couple, you only have the options of filing as married jointly or married separately. However, couples of same-sex marriages can file as head of household and this comes with various tax perks as well.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. / Tel:888.321.6188

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