The following are various tax considerations that arise for unmarried individuals who live together as registered domestic partners or partners in civil unions under state law. These partners may be of the same sex or, in some states, of opposite sexes.
Individuals in these relationships have many of the same rights and responsibilities as married individuals. But their relationship isn’t designated as a marriage under state law, and they aren’t considered married for federal tax purposes. So, they receive the same tax treatment as unmarried people living together.
Very Truly,
Dean R. Holland, CPA, MSA
Tax Considerations for Same Sex Spouses, Domestic Partners and Partners in Civil Unions
The following are various tax considerations that arise for unmarried individuals who live together as registered domestic partners or partners in civil unions under state law. These partners may be of the same sex or, in some states, of opposite sexes.
Individuals in these relationships have many of the same rights and responsibilities as married individuals. But their relationship isn’t designated as a marriage under state law, and they aren’t considered married for federal tax purposes. So, they receive the same tax treatment as unmarried people living together.
This result is unaffected by the Supreme Court’s 2013 decision in U.S. v. Windsor, which applies to only legally married same-sex spouses. But the Supreme Court’s 2015 decision in Obergefell v. Hodges allows same-sex couples in all states to marry if they choose in which case the marriage will be recognized for all federal and state purposes.
The following is a discussion of some of the most significant tax considerations for domestic and civil-union partners.
Filing status. Domestic and civil-union partners can’t file joint returns together. A domestic or civil-union partner can file as head of household if the individual meets the requirements for that filing status by maintaining a household that’s the main home of a relative who qualifies as a dependent. But maintaining a home for the other partner, or for a child of the partner who isn’t the taxpayer’s biological or adopted child, doesn’t entitle a taxpayer to file as head of household.
Dependency deduction. A domestic or civil-union partner can qualify as a taxpayer’s dependent if all of the following requirements are met:
- The partner’s a member of the taxpayer’s household. This means that the individual must live for the entire year (except for temporary absences) in a household that the taxpayer maintains by paying more than half of the household expenses.
- The taxpayer provides more than half of the partner’s support. Support items include food and clothing, lodging, medical and dental care, education, and recreation. Tax-exempt items, such as Social Security, are included in making the support computation. But scholarships and Medicare benefits aren’t included.
- The partner can’t have gross income above a certain limit ($4,050 for 2016; $4,000 for 2015). The full amount of gross income is counted, including business or rental income before deductions. But tax-exempt income isn’t counted.
Child tax credit. Taxpayers are entitled to a child tax credit (CTC) of $1,000 for each qualifying child under the age of 17 who’s the taxpayer’s dependent, with the credit phased out for taxpayers whose income exceeds certain levels. The credit’s available for a biological child, adopted child, or stepchild. For this purpose, a domestic or civil-union partner is the stepparent of the other partner’s child if so treated under the law of the state in which the partners live.
Medical expenses. Medical expenses paid for oneself or one’s spouse or dependents are an itemized deduction to the extent that the expenses total more than 10% of adjusted gross income (AGI), or 7.5% of AGI for taxpayers age 65 or older through 2016. Medical expenses that one domestic or civil-union partner pays on behalf of the other partner aren’t deductible unless the partner whose expenses are paid qualifies as the payer’s dependent. But an individual can qualify as a dependent for this purpose regardless of that individual’s gross income.
If medical expenses aren’t deductible under the above rule, then consider having a partner give money to the other partner, who will then use it to pay the other partner’s own medical bills. This strategy will work if the partner paying for the medical bills (with the money received from the other partner) can deduct the payments.
Home mortgage interest. Mortgage interest on a primary residence is an itemized deduction. The deduction can be taken by the individual who both owns the home and pays the interest. So, where domestic or civil-union partners own their home jointly, each can deduct the amount of interest that he or she pays. If the home is in one partner’s name, then only that partner can claim the deduction, and only to the extent that he or she pays the interest. If the non-owner plans to pay part of the interest, then the deduction can be preserved by giving the funds to the owner, who will then make the interest payment.
Sale of main home. A taxpayer can exclude from income up to $250,000 of gain from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years before the sale. The full exclusion applies to only one sale every two years.
So, if both domestic or civil-union partners own homes that qualify for the exclusion, each can sell the home and exclude up to $250,000 of the gain, for a total of $500,000. Because the partners aren’t married for federal tax purposes, it makes no difference that the sales occur within two years of each other.
A married couple filing jointly is entitled to a $500,000 exclusion if either spouse meets the two-year ownership requirement and both spouses meet the two-year use requirement. Because domestic and civil-union partners aren’t considered married, they can’t claim this $500,000 exclusion. But if they own a home jointly and sell it, each one can exclude up to $250,000 of the gain, for a total of $500,000.
Health benefits for domestic or civil-union partners. An employee can exclude from income the cost of employer-provided coverage under an accident or health plan for the employee, the employee’s spouse, or the employees’ dependents.
Many employers have extended this coverage to the domestic or civil-union partners of employees. But unless the partner qualifies as a dependent of the employee, the difference between the value of the coverage for the employee’s partner and payments made by the employee for that coverage is included in the employee’s gross income.
Income tax and Social Security (FICA) tax will be withheld on this included amount, even though the employee isn’t receiving any additional cash wages. But the employee’s then treated as providing the coverage from the employee’s own funds, with the result that benefits received under the plan are tax-free.
Retirement savings and pensions. A participant in a pension plan or other qualified retirement plan, such as a 401(k) plan, is entitled to name a domestic or civil-union partner as the beneficiary of the plan in the event of the participant’s death.
At death, plan benefits may be distributed in a lump sum or as an annuity. If an annuity form of distribution isn’t available and the beneficiary chooses not to take a lump sum, then the benefits can remain in the plan, but they would have to be distributed in accordance with certain minimum distribution requirements.
The surviving partner is subject to income tax on the benefits as they are distributed. A surviving partner can also make a tax-deferred rollover of a deceased partner’s retirement benefits into the surviving partner’s own individual retirement account (IRA).
Estate and gift tax. Because domestic or civil-union partners aren’t married for federal tax purposes, they don’t qualify for the unlimited marital deduction from the gift and estate taxes. But up to $14,000 of gifts that one partner makes to the other in 2016 is tax-free under the annual gift tax exclusion.
After that, taxpayers begin to use up their estate tax unified credit. In 2016, the amount exempted from gift tax by the unified credit is $5,450,000 (reduced by all amounts allowed as a credit in previous years).
The gift tax doesn’t apply to payments of another individual’s tuition made directly to a school or to payments of another individual’s medical expenses made directly to a medical care provider. So, these payments can be made on behalf of a domestic partner or civil-union partner without incurring gift tax liability.
