With tax season upon us, you and your partner may be in for some good news: Some gay couples have a distinct advantage over married couples, at least when it comes to income taxes.
This is, of course, no reason to stop fighting for the right to marry. But as long as the government refuses to acknowledge gay marriages and partnerships, those couples might as well pay as little tax as possible to that government.
For unmarried couples — gay or straight — the key to saving on income taxes is to think of yourselves as a unit rather than two single filers, even though you won’t be filing a joint return.
Here are some areas that when used cleverly can save on taxes.
Mortgages. When purchasing a house or condo, consider whether one partner’s tax bracket is much larger than the other.
For example, suppose Mike is a high-powered lawyer making $140,000 a year, putting him in the 28 percent federal tax bracket, while his partner, John, is Ph.D. student making $20,000 placing him in the 15 percent bracket. It makes sense to have Mike take out the mortgage, so that he can deduct the mortgage interest on his tax return.
A 30-year fixed mortgage of $300,000 will generate nearly $18,000 in interest during the first year. If Mike deducts that interest amount, he will save $5,000 in taxes. If Mike and John took the mortgage out together and split the interest deduction, they would save less than $4,000 in taxes. Keeping the mortgage in John’s name, they save little more than $1,000.
Charitable Contributions. Like the mortgage interest deduction, we want charitable contributions, which are tax deductible, going on the tax return of the partner in the highest tax bracket. Using Mike and John, we can see that every dollar in charity donations under Mike’s name will save 28 cents in taxes while those under John’s name save only 15 cents. Now, 13 cents might not sound like much, but for those generous couples out there who give thousands of dollars a year, it can equal hundreds of dollars in tax savings annually.
Shifting Assets. Another way that partners can leverage the difference between their tax brackets is to shift their assets. If Mike and John have six-months worth of living expenses totaling $20,000 in a money market account and CDs earning 3 percent a year, they’re receiving $1,200 a year in interest. By placing those funds in John’s name rather than Mike’s, they could save $150 a year in taxes.
The same principle applies if Mike and John have a large amount of interest-earning bonds.
Mike and John could also save some money if Mike has several stocks that he purchased less than 12 months ago and would like to sell. If Mike sells the stocks, his profit will be taxed at 28 percent. But if he gives the stocks to John, who then sells them, his profit will be taxed at 15 percent.
Dependents. You may also be able to claim your partner as a dependent for an extra exemption. To claim someone as a dependent who is not related to you, that person must:
- live with you for the entire year
- have income less than the personal exemption for the year, unless he or she is a child (in 2004, the exemption is $3,100)
- receive 50 percent or more of his or her total support from you
- not file a joint return if she or he is a spouse
- be a U.S. citizen or resident of Canada, Mexico or the United States.
For someone taking care of a sick partner, this may be an option.
Of course, not all of these strategies will work for everyone. First off, they can be complicated, so you should talk with a tax advisor before making any of these moves. Also, you need to consider whether these approaches fit your particular situation. For example, when taking out a mortgage, consider which partner has the best credit. If the partner making the most money has very bad credit from missed student loan payments, he may not be the right person to take out the entire loan. The tax savings likely won’t make up for the higher interest payments.
And remember, once you and your partner think and operate as a unit, you must protect yourselves with written agreements, since there are no marital laws to protect you.