All Couples Are Not Created Equal in the Tax Code

Gay MarriageEqual rights for lesbian, gay, bisexual, and transgender Americans is often viewed as a moral issue, or a religious one. But in many ways, it's a financial issue, as well -- one that leaves same-sex couples paying thousands of dollars more every year to the IRS in taxes.

A recent CNNMoney study revealed that LGBT couples are paying as much as $6,000 annually in extra taxes because they can't file tax returns jointly at the federal level. (They can on state returns in the few states that do recognize same-sex marriages.)

Simply preparing one's taxes if you are in a same-sex couple can result in additional administrative costs. For example, if a couple lives in a state that recognizes their same-sex marriage, they'll often have to prepare several different tax returns, including some "dummy" returns. The situation is complex because the federal government doesn't recognize the marriage for purposes of filing a joint return -- meaning even more paperwork to prepare and manage, and often, the added cost of paying a professional for tax planning and preparation assistance.

And we haven't even gotten to the actual differences in tax treatment yet.

How the Dollars Add Up

Here are some of the ways that same-sex couples suffer financially, come tax time:

  • They are not allowed to combine their income and deductions, which could reduce their tax bill.
  • If a same-sex couple has one spouse covered by the health insurance plan of the other, the value of that employer-provided coverage is generally counted as taxable income. So even though you receive no cash from the insurance, if it's valued at $6,000, the couple ends up taxed on that. With married couples, spouses covered by employer plans face no such tax treatment and enjoy tax-free coverage.
  • In many same-sex partnerships, one partner files as "head of household," but in that category, more income is taxed at higher rates. The standard deduction taken by those who don't itemize deductions is lower for heads of households than for those married and filing jointly.
  • A married couple selling a qualifying home can exclude from taxation up to $500,000 of the gain from the sale -- double the $250,000 exclusion for single folks. Same-sex couples not recognized as married by the federal government can end up able to exclude only $250,000.
  • When a married person dies, the surviving spouse receives an inherited estate up to a value of $5 million tax-free. The balance is taxed at 35%. That's not the case with LGBT couples, whose marriages are not federally recognized. In a case in New York, a widow is suing the federal government to reimburse her for the $350,000 she had to pay in taxes on the estate of her longtime partner and wife.

Removing Bias From the Tax Code

While public attitudes toward the same-sex marriage issue remain divided, the tax situation has many people shaking their heads not only at the unfairness, but also at the irony.

For one thing, all these extra LGBT dollars are going toward a government that discriminates against LGBT citizens. And at the same time, public support for marriage equality in America has been growing briskly, so that a majority of Americans now support it -- 53%, per a Gallup poll, up from 44% just a year ago.

Also, when it comes to marriage and taxes, it's not just the LGBT community that suffers. The so-called "marriage penalty" has been long lamented for costing some married couples more in taxes than if they filed singly. But that penalty has been reduced in recent years, and in general, it's more tax-advantageous to file jointly as married -- if you can. But also, don't forget that various tax credits phase out sooner for single filers than for joint filers, so these folks can end up not qualifying for breaks that paired off male-female couples get.

The best solution for all would be simplification and some tax reform. A tax code that doesn't penalize singles or couples on the basis of their filing status would be better, and an America that recognizes same-sex marriages at the federal level would make tax treatment for all couples simpler and more fair.

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio.

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