4 APRIL 4, 2003
www.houston voice.com HOUSTON VOICE
Domestic partner benefits create 'tax hit' for couples
GAY TAXES, continued from Page 1
Gay couples not 'married'
Gay single people don't face any different
issues when filing their income taxes than
other singles, according to Marta Shen, a
CPA and senior financial advisor with the
Atlanta-based firm of Shen, Clarke &
Associates, a financial advisory branch of
American Express Financial Advisors, Inc.
"They are equivalent to straight single tax
fliers — there's no difference there," said Shen,
whose client-base is more than 50 percent gay
But gay couples must confront a variety of questions that their married counterparts don't face
Couples who receive domestic partner benefits will find themselves paying more taxes
than if they were married, and must decide if
the benefits outweigh the costs. Couples who
own a home together must decide who gets to
deduct the interest paid on their mortgage.
Couples who share a savings account have to
determine who claims the interest income. Couples
who are both legal parents to their children must
figure out who should claim the kids as their dependents, and there are myriad other issues.
"The negative impact is that a gay couple has
to do a lot more tax planning in advance," said
Harold Lustig, president of San Francisco-based
Lustig Financial Services and author of "4 Steps
to Financial Security for Lesbian & Gay Couples."
The 2000 Census documented 594,391 house
holds led by same-sex "unmarried partners,"
and gay activists claim the number is a vast
undercount of gay couples in the country
But despite clear evidence that gays are
forming families, the federal government still
offers no legal recognition for the relationships.
Gays are not allowed to marry anywhere in
the US. And while gay partners can be just as
financially intertwined as many heterosexual
spouses, the Internal Revenue Service uses marriage to determine your tax filing status, the basis
on which the income tax you owe is calculated.
"In general, your filing status depends on
whether you are considered unmarried or
married," the IRS explains in Publication
501, "Exemptions, Standard Deduction and
"A marriage means only a legal union
between a man and a woman as husband and
Financial advisors Marta Shen and Harold Lustig
said gay couples could benefit by not filing joint tax
returns if they plan carefully.
wife," the publication warns.
Even if gay couples consider themselves
married, they shouldn't try to submit a married tax return, according to Eric Erickson,
spokesperson for the IRS field office in Atlanta.
Tax returns include your Social Security number and Social Security information includes your
sex. "Basically we do a check with your Social
Security number, and it's going to come up [that
both filers are the same sex]," Erickson said. "We
would catch it and your return would be rejected."
The Internal Revenue Service can't independently make changes to tax filing status,
"Every piece of the tax law has been written by
Congress," he said. "We are only here to enforce it."
Tax disadvantages for gay couples
Being unable to acknowledge relationships on
tax forms is just one of the many types of das?
crimination gay couples face because they cant
marry according to Evan Wolfson, executive
director of the Freedom to Marry Collaborative, a
national group lobbying for equal marriage rights.
"Marriage is the gateway to a vast array
of legal and economic privileges that cuts
across virtually every area of life," he said.
One major way that the tax code clearly
discriminates against gay couples lies with
the taxation of domestic partner benefits,
according to the Human Rights Campaign,
the nation's largest gay political group.
"As a growing number of employers offer
domestic partner benefits, gays and lesbians
are discovering a hitch — domestic partner
benefits, unlike health benefits provided to
married heterosexual couples, are taxed as
income," HRC notes on its FamilyNet Web site.
With most health benefits, the employee
pays part of the cost and the employer pays
part of the cost. Unlike with spouse benefits,
the employer's contribution towards DP benefits is taxable income for the employee.
For example, if a company contributes
$3,000 per year towards spouse benefits for a
straight employee who earns $30,000 a year,
the employee is still taxed on $30,000.
But if the company contributes the same
$3,000 to domestic partner benefits for a gay
employee who earns the same salary, that
employee will be taxed on $33,000.
"The tax hit is significant enough that
many people who are eligible for domestic
partner benefits don't take advantage of
them," said Lara Schwartz, senior counsel
for HRC. "It's a very real disadvantage."
HRC is lobbying for federal legislation to
solve the problem, said Barbara Menard,
deputy political director for the Washington-
based advocacy group.
Sponsored by U.S. Rep. Jim McDermott CD-
Wash.), H.R. 935 would change tax laws to treat
domestic partner benefits like spouse benefits.
It currently has 30 co-sponsors and is pending
before the House Ways & Means Committee.
Meanwhile, gay couples also need to be aware
of other ways they can be hurt by the tax code
because their relationships aren't treated as marriages, such as estate taxes, real estate transfer
taxes and capital gains taxes, Schwartz said.
Older gay couples may be particularly hard hit
"For example, on the sale of a home, under
federal tax code a single person is entitled to up
to $250,000 in gains on the sale tax-free, but a
married couple gets twice that," Schwartz said.
"For a gay couple that has lived in a home for a
very long time and is planning on using [the income
from the sale] as retirement savings, that lower
threshold can absolutely create a tax hit" she said
Possible perks for partners
Despite tax disadvantages on issues like
domestic partner benefits, not filing as a married
couple actually offers some significant possibilities
for gay partners to reduce the amount they owe,
according to financial advisors Shen and Lustig.
"On the tax side, I think it is better to be gay
— if you know what you are doing," Shen said.
As an "overall strategy" for gay couples, "the
person who is making the most should deduct
the most, and whoever is making less should
claim as much of income as possible," she said.
The key to saving money is to look at the
couple's taxes as a whole, so that the total
paid by both partners is less, Lustig agreed.
"You have to look at the pool of money as our
money and the tax paid as our taxes paid," he said.
Lustig advocates a strategy called "bunching" — where the person with the higher
income itemizes deductions, taking all of
them, and the person with the lower income
takes the IRS' standard deduction.
But making such a strategy work requires
planning. For example, the partner who plans
to claim the mortgage interest deduction has to
be named on the mortgage, and if both partners are named, the one who plans to claim the
deduction should write the checks, Lustig said.
And if couples are making charitable donations, those checks should also be written by the
partner who will itemize deductions, he said.
Gays can also find ways to lower their
taxes when it comes to claiming dependents,
Shen and Lustig said.
In gay families in which only one partner is
legal parent to their children — because second-parent adoption or joint gay adoption isn't
allowed in their area — there is no choice in
who can claim the child as a dependent.
But if both partners are legal parents to the
child, "the person with the bigger tax problem
should take the child as a dependent if they meet
the rules of dependent deductions," Lustig said.
The rules for claiming someone as a dependent can also provide opportunities for gay couples in which only one partner works, although
Lustig strongly recommended seeking profes-
sional tax help before trying to claim your partner
as a dependent due to the complexity of the law
The IRS lists five tests to determine if some
one can be claimed as your dependent, including that you must have provided more than 50
percent of their support and they must not have
a gross income of $3,000 or more during the year.
One particular part of the tax code raised
issues for gays, Shen said — a clause mandating that "a person does not meet the member
of household test if at any time during your
tax year the relationship between you and
that person violates local law."
Common tax questions facing gay couples
Note: These answers are a general guide. Every However, trlre is a taxpayer ID where the mort- Again, there is a "prinWy" perSflffwho tlt_RS I work outside of the home,.
Note: These answers are a general guide. Every
gay couple's individual circumstances are different.
To see how these issues will impact your individual
situation, consult a tax advisor.
/ receive health insurance through my partner's
domestic partner benefits. Do I have to pay ^
taxes on the benefits, or does my partner?
Your partner will have to pay taxes •'
on imputed income for the DP bene- , ,,
fits that her company provides. .'/'
My partner and I own our home
jointly. Who can deduct the mortgage
interest? Do we have to split it or can
one of us take the whole deduction?
If the mortgage is held jointly, technically the
person who pays is the person who gets to deduct
However, tHIre is a taxpayer ID where the mortgage interest is reported on form 1098 and that
person is the "primary" person on the mortgage and
person the IRS "connects" with the mortgage. If
the person that is not the primary takes it, it's best
to have an attachment to both returns explaining it
Oftentimes, certified public accountants
/ will look at it both ways, i.e. what the ram-
' - ification would be if one partner (usually
the one that makes more) takes it or if
they split it, and what
percent each should
take to make it the
My partner and I have a joint savings
account that earns taxable interest. Who claims
the interest as income on our taxes?
Again, there is a "prinftfy" perWwho t_.RS
connects the interest to who gets the 1099-INT.
Usually, it's best to have the partner earning less to
report since it'll be in a lower tax bracket.
My partner and I are both legal parents of our
child. I'm the birth mother and she adopted our child
through second-parent adoption. Which one of us can
claim the child as a dependent? Or can we both?
Unfortunately, there can only be one exemption
made on one child, therefore you're going to have to
decide who that will be. Both of you have the ability to claim the child as long as the other five
requirements of dependency (provide more than 50
percent of the support, less than $3.0(5, in income,
citizenship, relationship/member of household, not
filing jointly) are met It would make sense for the
one in the higher bracket to claim the child.
e, and my partner is
a stay-at-home parent. Can I claim my partner as
a dependent on my taxes?
Most accountants will agree with this as long
as the five dependency tests above are met.
7 work outside of the home, and my partner,
who has HIV, receives disability checks. Can I
claim him as my dependent?
It depends. If the five tests above are met, then
usually you can claim him as a dependent. The big
question is if it will jeopardize any benefits, like
Medicare, Medicaid and or SSI. That's a guestion that
is best left to an attorney specializing in this field.
branch of American Express FinancialAdvisors, Inc.