Federal Income Tax and . . .

bd10267_.gif (311 bytes)  Domestic Partner Benefits

Under the Internal Revenue Code, benefits that an employee receives for his or her spouse are not taxable. Even if the spouse who gets the benefits earns more than the employee and, therefore, is not in fact a "dependent" of the employee, the benefits to the spouse are tax free.

But benefits provided to an employee’s domestic partner are taxable, unless the partner meets the IRS test for "dependency" – which most will not because they are themselves making more than $2,800 which the law allows a dependent to earn.

If the employee is in a 30% tax bracket, and the value of the employer’s contribution to the partner’s health, dental, and other benefits is $10,000 per year, the employer is required to withhold $3,000 per year from the employee’s paycheck. In addition to that, states such as California with a sizeable income tax will tax these benefits too.

Over the course of 10 years, the employee with a spouse may save $30,000 in taxes while the worker with a domestic partner must fork that amount over to the government in federal and state income taxes.

Congressman Barney Frank has a bill pending (HR 638) to exempt these benefits from tax. There are more than 6 million unmarried couples in the nation. Many of them would be helped by this reform.

bd10267_.gif (311 bytes)  Joint Tax Returns

Married couples may file a joint return. Unmarried taxpayers may not file a joint return with an adult house-hold member such as a parent, sibling, or domestic partner.

An unmarried taxpayer could save money by filing a joint return with a household member who earned considerably less and was in a lower tax bracket. This could put the higher-earning taxpayer in a lower bracket too.

For example, an unmarried professional who has $60,000 in gross taxable income, and who takes a standard deduction might want to file jointly with an elderly widowed parent who lives with the professional on a long term basis. Let’s say the parent receives $8,000 from social security. As head of household, with two dependents claimed, the professional would pay nearly $9,000 in taxes. If a joint return could be filed with the widowed parent, only $7,500 would be owed, creating a savings of about $1,500 in taxes.

Other unmarried taxpayers who have a significant income disparity with a household member, such as a domestic partner, would also benefit if the law allowed joint returns by unmarried adults.









bd10267_.gif (311 bytes)  Adult Dependent Status

Federal law allows a taxpayer to claim an adult as a dependent, thereby saving money on a tax return if several criteria are met. They must live together the whole year and the taxpayer must provide more than 50% of the other adult’s support. The dependent may not earn more than $2,800 (unless a student under 24 and then he or she can earn more).

But there is one glitch which prevents a dependent status from being claimed in several states. The relationship between the taxpayer and the household member must not violate local law. Court cases have interpreted this proviso as meaning that a taxpayer may not claim his or her unmarried opposite-sex partner as a dependent if they live in a state which has a law prohibiting fornication or unmarried cohabitation.

Jurisdictions with such criminal laws include: Arizona, Florida, Georgia, Idaho, Massachusetts, Michigan, Minnesota, Mississippi, New Mexico, North Carolina, North Dakota, South Carolina, Utah, Virginia, West Virginia, and Washington, D.C.

A taxpayer living in these areas, and whose significant other is factually a dependent under all of the other criteria, is deprived of the $2,800 deduction, while taxpayers living in other regions of the nation are not.

bd10267_.gif (311 bytes)  Child Tax Credits

Last year, Congress changed the definition of "foster child." As a result, many unmarried parents will not be able to claim the $500 child credit and the earned-income credit, which is worth up to $3,888.

The tax code had two requirements to determine whether you qualified as a foster parent: (1) The child had to live with you the entire year; and (2) You had to provide more than half the financial support for the child. But starting this year, the child either must be a qualifying relative or be placed in the home by a government agency.

The requirement that a placement agency be involved is a significant hurdle for single parents who find new partners. It's not enough that the new partners care for the children as their own for the entire year.

Among those hurt, for example, is a family in which a divorced mom stays home to care for her children while her boyfriend works. Though related by blood, she won't qualify for either credit because she has no earned income. He won't qualify because he's not related by blood, and the kids weren't placed in his care by an official agency.