Taxes 101 For Domestic Parents & Same-Sex Couples

As Benjamin Franklin famously said, "nothing in this world is sure but death and taxes". Unfortunately, this is more than true for domestic parents and same-sex couples all across the country. What many people do not realize is that there are significant tax disadvantages for non-married couples that nearly all gay couples face every year. Even though dozens of states and over 50% of Fortune 500 companies offer domestic couple benefits, the federal government does not offer any.

This tax season I am reaching out to LGBT Americans by providing insightful tax tips and advice. A few weeks ago I posted an entry with generic tax tips for members of the LGBT community, and to follow up I decided to take a closer look at the tax and financial issues faced by domestic partners and same sex couples in this country.

Civil Marriages vs. Legal Documents

To understand the importance of tax equality, I think it is first important to understand the common misconceptions surrounding same-sex couples and taxes. You have probably heard before that civil marriages and same-sex marriage are not even necessary, that you can have any lawyer draw up the necessary documents. However, this is false. While it is true you can have a power of attorney appointed for certain asset-sharing and finances, it does not assure your partner access to your full wealth like a marriage would. Additionally, we all know lawyer fees are not cheap. In fact, it can cost a same sex couple thousands of dollars in legal fees to get similar financial rights as those awarded by a marriage. While a marriage license on the other hand, usually costs under about $50.

Taxes for Same-Sex Couples with Children

Perhaps the biggest tax inequality concerning the LGBT community affects couples who have children. Since the federal government does not recognize same sex marriages, couples who have children, or adopt, do not always qualify for the benefits most married couples would. Due to this large disadvantage, many same-sex couples with children can only take advantage of tax benefits for single parents.

Can Gay Marriage Save the Economy?

M.V. Lee Badgett, an economist at the University of Massachusetts’ Institute for Gay and Lesbian Strategic Studies did a study that found "...over the next three years about 32,200 same-sex couples would travel from other states to marry in Massachusetts, which became the first U.S. state to legalize gay marriage in 2004." All of these couples will be spending their weddings, and money, in Massachusetts, and will greatly help stimulate the state’s economy.

According to studies the U.S. gay community spends a whopping $174 billion annually within the country, and just imagine how high that number would be if those couples were allowed to wed. With that much money being spent you would think the federal government would want a piece of the pie. Although the US economy may not be saved by gay marriage's legalization, it could certainly help.

Social Security Tax Disadvantage

The LGBT community, like everyone else, must pay their social security taxes every tax season. The difference is, no matter how many years they have been with their partner, they cannot take spousal benefits or survivors’ benefits. Reports from the census 2000 found "when a gay, lesbian, or bisexual senior dies, his or her surviving partner faces a financial loss that can amount to tens of thousands of dollars.”

LGBT Real Estate Taxes

Another financial difficulty same sex couples face has to do with the transfer or property between one another. An article by the Advocate Online found that "when someone puts his or her same-sex partner on the title to a home, it often constitutes a transfer of 50% of the value of the home -- as if the two were strangers -- and is taxed accordingly. Different-sex married couples do not pay this tax. Inheritance taxes apply when a taxpayer dies and leaves assets to another person. Different-sex spouses receive a complete exemption from such inheritance taxes, but same-sex partners do not. Because thresholds for state inheritance taxes are much lower than the federal threshold, inheriting the couple’s common home (or even the half of it that belonged to the deceased partner) can trigger inheritance tax."

Connecticut and Massachusetts Residents

Since these are the only two states where same-sex marriages are recognized, different tax incentives apply to same-sex couples there. In these two states, married same-sex couples can claim all marriage tax incentives, on their state returns. However, on their federal returns, since same-sex marriage is not federally recognized, same-sex couples must file separately.