 Domestic Partner BenefitsUnder 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.
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. |
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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.
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. |