Monday, February 22, 2010

Tax Tips for Same-Sex Couples - Bucks Blog - NYTimes.com

Tax Tips for Same-Sex Couples - Bucks Blog - NYTimes.com

Tax Tips for Same-Sex Couples
By TARA SIEGEL BERNARD
What if You're Gay - Your Money - Bucks Blog - NYTimes.com

Gay couples have complicated financial lives, and preparing tax returns is no exception.

Since the federal government doesn’t recognize same-sex marriage, gay couples who are living in states that do recognize their various legal unions must still file separate federal returns. That requires more record-keeping and planning than their heterosexual counterparts — and oftentimes, gay couples will have to pay more to an accountant to prepare their returns.

But the consequences aren’t all negative. By remaining unmarried, some same-sex couples will avoid the so-called marriage penalty. This occurs when a couple’s combined income pushes them into a higher tax bracket than if they had remained single. Or, they may qualify for more tax deductions or credits that phase out as their income rises.

On the other hand, plenty of same-sex couples end up paying higher tax bills than their heterosexual married counterparts, including those with a stay-at-home parent. That’s because the tax code tends to favor married couples with disparate incomes or a nonworking spouse.

No matter which category you fall into, tax experts say the best way to minimize the tax bite is to look at both partners as an economic unit. If the higher-earning partner won’t get the full child tax credit, should the lower earner take it? Who should file as head of household, which has more favorable rates than the single filing status?

“Gay taxpayers will do best when they look at their tax results as a household, and not as individuals,” said Tina Salandra, a certified public accountant in New York.

Just be prepared to spend some extra time strategizing. “If you are filing separately but are really leading very joint lives, there are many extra things you need to do,” said Jeff Pretsfelder, a senior tax analyst at the tax and accounting business of Thomson Reuters.

We list some of those items below, along with several other things you need to keep in mind:

New Items for 2009 If you bought a home and expect to be eligible for the home buyer’s tax credit, remember that you must split the $8,000 credit with your partner. “The I.R.S. was very clear that if two unmarried people or a same-sex couple buy a home, they need to split the credit,” Ms. Salandra said. But there is a potential benefit: Since the home buyers’ credit phases out as your income rises, and same-sex couples don’t combine their income on their federal returns, the lower-wage earner may still qualify for half the credit even though the higher earner is above the limit, she added.

Separately, the Internal Revenue Service issued guidance in a memo from its chief counsel’s office that clarifies how much mortgage interest is deductible for people who own homes jointly. Taxpayers who file as single or married filing jointly can generally deduct all of their mortgage interest on up to $1 million in mortgage debt and $100,000 in home equity debt (or half those amounts if married filing separately).

Some same-sex couples — or the professionals advising them — have interpreted that to mean that each partner could deduct interest on up to $1 million in debt. But in a memo in March 2009, the I.R.S. said that the $1 million limit is per home, not per taxpayer. So a gay couple who jointly owned a Manhattan apartment could deduct interest on only up to $1 million in debt, not $2 million. “That is incredibly significant for gay couples, especially in a high real estate market like New York City,” she added.

Filing Status. Unlike heterosexual married couples, same-sex couples can choose to have one partner file a federal return as “head of household,” where tax rates are lower than filing as single. To qualify, you must be unmarried or considered unmarried, have paid more than half the cost of keeping up a home and live with a “qualifying person,” like a dependent child. So generally, only one partner (who is also the legal parent of a dependent child) can claim this status on a federal return. But it’s not impossible for two partners to claim head of household — one partner, for instance, may be supporting an elderly parent, while the other is supporting a child.

It often makes sense for the higher-earning partner to file as head of household, but not always.

States operate according to their own rules. And not all states that recognize same-sex marriage extend that recognition for tax purposes. New York, for instance, says it recognizes gay marriage, but it doesn’t allow married couples to file joint state returns.

But if you live in a state that recognizes your union — whether you’re married, registered domestic partners or part of a civil union — you will probably be required to file joint returns (or married/civil union/domestic partner filing separately). But each state varies, so be sure to evaluate which filing status will save you the most money.

Strategies If you have joint accounts, property or children, the question then becomes who should deduct what and what filing status each partner should take, if one or both have the option of filing as head of household.

Generally speaking, the person who pays the expense gets the deduction, said Chris Kollaja, an accountant and partner at A.L. Nella in San Francisco. For instance, if you paid 60 percent of the mortgage payments, you could deduct that percentage of interest, while your partner could deduct the remaining 40 percent. But to take a deduction, you need to have an ownership stake in the property.

“Like any two people who are roommates that don’t file a joint return, there is the question of who pays for certain things, and there is a need to document that,” Mr. Pretsfelder said.

Extra Paperwork When it comes to jointly held accounts or property, you should call your bank or brokerage to get two copies of the forms that report any sort of miscellaneous income (including the 1099 form, which lists any income earned other than wages, salaries or tips, or the 1098 form, which lists mortgage interest paid). The banks usually send out only one form to the person whose Social Security number is listed first, which doesn’t affect heterosexual couples filing jointly.

If, say, you split the interest income collected on a joint savings account for tax purposes, you will want to attach a letter to each partner’s tax return, along with a copy of the relevant form. The letter should state that the accounts are held jointly, and that you’re splitting the interest, the dividends or whatever the item.

“The partner whose Social Security number is not on the tax form may be challenged by the I.R.S., saying we have no records,” Ms. Salandra said. “That is all remedied by a letter and documentation that shows the other taxpayer’s name on the joint account.”

Gifts While heterosexual couples can freely transfer money, property or expensive cars and gifts to one another without tax consequences, same-sex couples cannot: anything valued above $13,000 per calendar year is considered a taxable gift. So Ms. Salandra recommends that her clients keep a joint bank account to pay their joint expenses — and that each partner keep records of how much he or she contributed to the account.

“I caution them not to put more than the gift limit over than what the other person was putting in,” Ms. Salandra said. If you did give your partner a gift valued at more than $13,000 last year, you are required to file a gift tax return by April 15, and the amount will be counted against your $1 million lifetime exemption.

Heterosexual married couples “can arrange their affairs any way they want without a tax burden, and generally that doesn’t happen for gay and lesbians,” Mr. Kollaja said.

Professional Help It often pays to get professional help, especially from an accountant who is well versed in these issues. PridePlanners, a group of financial planners who serve gay and lesbian clients, has a list of providers by state.

But same-sex couples can expect to pay more in tax preparation fees. This is especially true for couples who live in states that recognize their unions and require them to file their state returns jointly (or married/civil union/domestic partner filing separately). That’s because the couple must first file separate federal tax returns (as single or head of household). But the tax preparer must also create a dummy federal tax return using a married filing status, so that they can use that data for filing the joint state return.

While a heterosexual married couple needs to file only two returns, a same-sex married couple living in a gay union state must file three returns, but technically fill out four. (In our article that tallied up the extra costs that same-sex couples incur over the course of their lifetimes, we found that same-sex couples could spend around $12,300 more on tax preparation fees than their heterosexual counterparts).

What issues have you run into when filing your returns? How did you solve them? Please share your tips in the comment section below.

Have a specific question? Ask our tax expert, who will be answering questions from same-sex couples throughout the week