Four Tax Tips for Same-sex Couples

2013 is shaping up to be an exciting tax year for same-sex couples. This month, the Supreme Court has agreed to hear two cases that can change both federal tax laws and marriage laws.

Who will be affected? These federal tax changes will affect same-sex couples who are legally married, as well as registered domestic partners (RDPs). It will not affect couples who are simply living together without benefit of paperwork. If the Supreme Court rules that the Defense of Marriage Act (DOMA) is unconstitutional, then all same-sex couples will have the same tax rights as any heterosexual couple–on a federal level. State laws will still apply.

While you’re waiting for a decision, consider filing amended personal or estate tax returns for prior years as a protective claim, in case the Court rules in your favor. What’s a protective claim? I’ve outlined the why and how in a recent MarketWatch.com article.

Meanwhile, back on the farm, what do same-sex couples need to know about existing law?

1) If you are a married same-sex couple or RDP, you can file a joint return with your state (if your state recognizes your status).

2) If your state does not recognize same-sex marriages or RDP, you must each file a separate return with the IRS, with each person only reporting his or her own income and expenses. Your status will be single, or, if there are children, one or both of you may file as head of household (HOH). The HOH option will be based on who provides more than half the cost of the household for each child, so start planning your spending and support early in the year.

3) In community property states, the IRS has special rules requiring that the couple split all income and expenses according to community property laws. Even though the income is split, when it comes to self-employment taxes (SE), the person who actually earned the business income (or profits) pays the SE taxes. This can get complicated, especially if there were pensions or other assets built up before marriage.

4) There will be special bonus for some families—a quadruple-dip on adoption costs. The IRS says that each partner may claim the full amount of the available adoption credit. Each person may only claim the credit for qualified expenses he or she actually pays. Plus, each person’s employer may pay adoption expenses up to the limit. That means that for each year in which adoption expenses were paid, you can pick up a tax credit and employer reimbursement worth up to four times the annual adoption limit. (Sometimes it’s good to be single in the IRS’s eyes.) If you adopted a child within the last four years, check to see if you can amend your tax return and get a big refund. William Perez, EA, summarizes the limits for the last several years here.

Remember to prepare a will or living trust to ensure that your partner or spouse inherits properly for federal and state tax purposes. And be sure to define who will get custody of your children. At present, same-sex couples are in legal limbo, so protect each other.