Your Money, Your Future
Your Money, Your Future

LGBT couples may be making this mistake on their tax returns

Key Points
  • A survey found that 35 percent of same-sex married couples are still uncertain about their tax-filing status.
  • Mistakenly filing as "married, separately" may result in loss of certain tax breaks.
  • The IRS recognizes gay marriages but not civil unions or domestic partnerships.
Gay rights supporters celebrate after the U.S. Supreme Court ruled that the U.S. Constitution provides same-sex couples the right to marry, outside the Supreme Court building in Washington, June 26, 2015.
Jim Bourg | Reuters

It's been nearly three years since the Supreme Court ruled that same-sex couples have the right to marry nationwide. Confusion over taxes, however, for these filers continues.

A recent survey by Credit Karma Tax found that more than a third of same-sex couples who got married between 2013 and 2017 said they were unsure and confused when it came to selecting their tax-filing status.

The personal finance site polled 155 individuals in March.

Nearly three out of four respondents didn't know that the Internal Revenue Service had issued guidance on how gay couples can file their federal returns, which means there's still room for missteps once tax season rolls around.

"If you're married in any jurisdiction, you're married for federal tax purposes," said Annette Nellen, chair of the American Institute of CPAs' tax executive committee. "Where people may still find some confusion is if you're in a registered domestic partnership or a civil union: You're not married."

Here are some common slip-ups same-sex couples may find as they prepare their tax returns.

Married or not

Same-sex couple rides in the Pride Parade on June 25, 2017 in New York City.
Spencer Platt | Getty Images

Two key Supreme Court decisions led to IRS recognition of gay marriage: U.S. v. Windsor in 2013 and Obergefell v. Hodges in 2015.

As it stands, if a same-sex couple married in a jurisdiction that authorizes them to do so, the IRS recognizes the marriage.

But here's the key: In order to qualify for certain federal benefits, including a higher standard deduction on your income taxes or a portable estate tax exemption, you actually have to get hitched.

Domestic partnerships and civil unions that may be recognized in the state where a couple resides aren't seen as marriages under federal law — and that can create confusion.

"In California, if you're registered domestic partners, you may file as married on your state return, but on your federal return, you're not considered married," said Nellen.

Separate vs. joint

Patryce Bak | Getty Images

A common mistake among LGBT couples is the idea that in order to avoid the marriage penalty — the higher taxes that affect married couples with high incomes — they need to file separately, said Scott Squillace, an estate-planning attorney who specializes in working with LGBT clients.

"There is a misconception that people think it means you can calculate your taxes as a married couple or do it as if you were single," he said.

"But once you're married, you're married for all income tax purposes — you can't go back to your individual income tax treatment by filing separately."

Filing separately makes sense for some: For instance, if your spouse has a dubious source of income and isn't being completely forthcoming with the IRS, you might want to file separate returns so that you're not responsible for his or her tax liability.

For the most part, however, married couples who file separately take lower standard deductions ($6,300 as opposed to $12,600 for joint filers in 2017).

They also miss out on a range of tax credits, including the child and dependent care credit and the American opportunity and lifetime learning credits.

If you want to claim this tax credit, you have to come clean to the IRS first

Married couples who file separately also face limitations on the adoption tax credit, a break of up to $13,570 per child in 2017. These spouses can only claim the credit if they meet certain requirements, including having lived apart for the last six months of 2017.

A number of the participants in the Credit Karma survey aren't aware of the adoption tax credit.

Finally, the income caps at which they can take a deduction for an IRA contribution are lower.

In 2018, married filers who submit separate returns are entitled to no deduction if their modified AGI is $10,000 or more.

By comparison, single filers who earn up to $63,000 can take a full deduction up to the amount of their contribution limit.

Tax cleanup

The good thing is that if you and your spouse submitted your taxes under the wrong status, the IRS allows you to file amended returns for up to three years.

Most participants in Credit Karma's survey were unaware that the IRS permits these do-overs of returns to take advantage of the benefits of filing jointly.

If you're reviewing your tax documents, it may be worthwhile to take a second glance at your estate plans and your beneficiary designations for your workplace retirement plan and life insurance policies.

Make sure that they reflect your marriage and your ultimate wishes as far as distribution of property.

"There is a host of things to consider, whether you are married or you cohabitate," Nellen said.

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