Classed as “single” by our tax system, gay and lesbian partners have some tax advantages
by Judy Arfa
Our financial and legal systems were not designed with the LGBT community in mind. In Texas, gays and lesbians are considered “single” for tax purposes. Though there are inherent disadvantages in this treatment, there are also some very real advantages and opportunities for tax savings, depending on your income and that of your partner. Here are some of them.
Tax Opportunities for the Self-Employed
Are you self-employed and your partner contributes to your business? Here are some special tax benefits for you:
• Couples who are also self-employed business partners can shift income to the partner who is in the lower tax bracket. For example, partner #1 is in the 33 percent tax bracket, and partner #2 is in the 15 percent tax bracket. Partner #1 can deduct professional fees paid to partner #2, thereby decreasing partner #1’s taxable income and perhaps moving him to a lower tax bracket. Partner #2 reports this income on his personal return and pays taxes at the 15 percent rate. This also works if only one of you is self-employed, so long as the self-employed person is the one with the larger income.
• If you hire your partner as an employee, you can deduct the health insurance premiums paid on her behalf as a business expense. Though your partner may report these premiums as an itemized deduction on her personal tax return, IRS limitations may result in no tax deduction.
• If you hire your partner as an employee, you can also deduct retirement plan contributions made on his behalf. Though your partner may report these contributions on his personal tax return, if he opened an IRA, had sizeable income, and was covered by another employer’s retirement plan, there would likely be no eligible tax deduction.
Tax Opportunities of Joint Property Ownership
- When you and your partner own a home as single joint owners, the home mortgage interest, real estate taxes, and homebuyer credit can be allocated in the most beneficial manner. Thus, home mortgage interest and real estate taxes do not have to be split 50-50, but can be split between the two personal income tax returns according to where the deduction will result in the greatest tax savings. Additionally, the $8,000 homebuyer credit can be split, or it can be claimed on only one return if only one partner would benefit from it. Attach an explanation to your returns to show how these deductions are being split between you and your partner.
- If you and your partner jointly own a home and sell the home at a gain, each partner is entitled to a $250,000 income exclusion (a married couple gets a $500,000 exclusion). If the home is sold at a $600,000 gain and the ownership is 50-50, a $300,000 gain is allocated to each partner. Each of you excludes $250,000 and reports $50,000 as a capital gain on Schedule D. The home must have been used as the primary residence in two of the previous five years. Second homes do not qualify.
- The IRS allows a loss of up to $25,000 on rental property if the landlord’s income is below a stated amount. If you and your partner jointly own a rental house, each of you can report 50 percent of the income and deductions on your respective returns, and each of you can show a loss of up to $25,000 (assuming that you each meet the income limitations). A married couple filing jointly is entitled to just a single $25,000 loss.
Tax Opportunities for Parents
- If a child is the biological child of one of you and the other has legally adopted the child—or if both of you are legal adoptive parents—you may decide which of your individual tax burdens will benefit most by claiming the child as a dependent. The partner who claims the dependent exemption is entitled to the child care credit, child tax credit, medical expense deduction, and education credit. There is an established income threshold for these credits, and if both of you exceed this threshold, only the dependent exemption will be available to you.
Tax Opportunities for Shared Investments
- If you and your partner have shared investments, you may split interest income, capital gains income, or other income—even when the 1099 statement is in the name of only one of you. A mandatory explanation of the split income must be attached to each return.
Judy Arfa is a CPA in Houston. This is her first article for OutSmart magazine.