Tax Savings for Domestic Partners

Seven states and the District of Columbia now allow same-sex couples to file joint returns.

By Kevin McCormally, Editorial Director, Kiplinger.com

January 2009

In the “be careful what you ask for” realm, many gay and lesbian couples around the country may be kicking themselves for their efforts to win the right to file joint state income-tax returns with their partner.

More and more couples are discovering what a mess it can be when the federal government and the states have starkly different rules. Here’s help to guide you through the nuances of filing as a couple—and finding the method that offers you the best tax advantages.

In Massachusetts (where same-sex couples can marry) and in California, Connecticut, the District of Columbia, New Hampshire, New Jersey, Oregon and Vermont (which recognize civil unions or registered domestic partners), qualifying couples can file joint state income-tax returns. That's still verboten at the federal level.

In California, unmarried, opposite-sex, cohabiting couples of which at least one partner is at least age 62 may also register as domestic partners and file joint state tax returns. Uncle Sam prohibits that, too.

But we're talking about state returns. Federal laws shouldn't come into play, right? Not exactly. Most states base their joint-return computations on the figures from your joint federal return. This means same-sex couples and other domestic partners must complete a total of four tax returns.

• First, each partner must complete an individual federal Form 1040 (or 1040-A or 1040-EZ) to file with the IRS.p>

• Then, the couple must create a mock or dummy joint federal return combining income, adjustments, deductions and credits.

• Finally, they use that fantasy return as the jumping-off point to prepare a joint state tax return.

What to do

If you are forbidden to file a joint federal return but required to file the equivalent of a married-filing-jointly or married-filing-separately return in your state, the first step is to be sure you understand your state’s rules. Here are the Web sites for the tax department of each qualifying state.

Tax software, such as TurboTax (for which Kiplinger provides in-product and Web content), will greatly simplify the process of completing the mock federal return. Should you send the return to the state? That depends on where you live. Vermont, for example, wants to see it; the District of Columbia does not. TurboTax has special instructions to help domestic partners, those in civil unions and married same-sex couples complete their state returns.

Win or lose?

A big question, of course, is whether filing a joint return on the state level will save or cost you money. So much has been written about the so-called marriage tax penalty at the federal level—the possibility that a married couple pays more tax than the combined total that husband and wife would owe if they were still single—that you might assume you'll pay more by filing jointly. That's not necessarily true. (Even at the federal level, for example, more couples enjoy a marriage tax bonus than suffer a marriage tax penalty.)

A study by California's tax agency found that about 60% of registered domestic partners will save an average of nearly $500 by filing jointly, about 12% will pay more (averaging about $750) and the rest will basically pay the same as if they continued filing as single taxpayers.

At the federal level, most married couples pay less tax by choosing to file jointly rather than separately. At the state level, however, filing separately often pays off in a lower tax bill. So you'll probably want to tackle another extra tax form: the equivalent of married-filing-separately. It might save you money. And, if you use tax software, such as TurboTax, it shouldn't be too onerous.

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