Domestic partners face more complicated financial planning issues than married couples, especially when it comes to tax preparation. Depending on which state a couple resides in and which companies the partners work for, the exact laws and numbers regarding the couple's benefits vary. Some states grant registered domestic partners benefits similar to those available to married couples, some of which are taxable. Many companies extend benefits available to employees' spouses to employees' domestic partners and dependents as well, some of which are taxable. Regardless, the Internal Revenue Service does not recognize domestic partnerships, complicating federal tax returns.
When a couple marries, a host of new responsibilities and benefits become available through the government and many employers. Many of these have nothing to do with taxes, such as hospital visitation rights or the right not to incriminate your spouse. Dozens more do, such as the ability to file taxes jointly, transfer unlimited amounts of property between spouses and have the cost of employer-provided health insurance deducted from taxable income. All spouses receive these benefits automatically. Registered domestic partners have the same rights as spouses in California, Nevada, Washington and Oregon, and a few other states offer identical benefits for those that have civil unions or for same-sex couples that marry (and hence, within the state, are legally designated as spouses). A few more states offer limited benefits to registered partners, but few of these benefits extend into the tax realm.
Regardless of where partners live, the IRS does not recognize domestic partners as a unit; each partner must file separately. There are two big tax ramifications: First, the higher earner pays a higher income tax rate than she would if she had the benefit of filing jointly with her partner. Second, if one partner's employer provides health coverage for the other partner (and any of the other partner's dependents), the amount that the employer pays for the partner of the employee and that partner's dependents must be reported as taxable wages. Additionally, pre-tax dollars (such as flexible spending accounts or health reimbursement accounts) cannot be used to pay for the partner's coverage. The lesbian and gay rights organization the Human Rights Campaign (HRC) reports that domestic partners end up paying an average of $1,069 more in taxes solely due to this rule. HRC further notes that the rule raises employers' payroll taxes.
Domestic partners who live in Oregon and California can file their state tax returns jointly. Filing jointly reduces the tax burden on the higher-earning partner, almost always saving the partnership money. Furthermore, both states allow partners to deduct the cost of health care from taxable income exactly as married couples do on both state and federal tax returns. However, partners must file multiple returns: one married, filing jointly (partners can opt to file married filing separately, but few do) state income tax return and two single federal income tax returns. Washington and Nevada do not have state income taxes; domestic partners file only federal returns.
While domestic partners tend to be permanent residents of one state or another, and thus concerned primarily with that state's laws regarding their relationship status, many employers operate in multiple states. More than half of the Fortune 500 companies provide domestic partner benefits to their employees, and many operate both in states such as California that promote equal rights for spouses and domestic partners (or simply allow consenting adults to marry, doing away with separate but equal statuses entirely) and states that have tried to deny benefits to domestic partners, such as Virginia. Many of these companies opt to offer benefits such as health coverage for employees' partners and dependents regardless of state residency, hire extra accountants and eat the extra cost. Some companies, led by Google, have begun compensating employees for the extra tax burden associated with providing their partners with health care.
- Human Rights Campaign: Taxation of Domestic Partner Benefits
- Human Rights Campaign: The Domestic Partner Benefits and Obligations Act
- Federation of Tax Administrators; State Individual Income Taxes; February 2011
- Oregon Department of Revenue: Personal Income Tax: Registered Domestic Partners in Oregon
- National Conference of State Legislatures: Same-Sex Marriage, Civil Unions and Domestic Partnerships