The voting public has generally thrown tomatoes at our relationships, not allowing recognition of same-sex couple marriages at the federal or state levels. These tomatoes can be cooked into a nice spaghetti sauce if someone applied creativity to the income tax law.
Let me give you an example of a couple ( the names and occupations have been changed for confidentiality purposes ) where such planning resulted in a $5,000 tax savings.
Alba and Susan lived together for 25 years and plan to live that way for the rest of their lives. Alba is a dentist/sole proprietor. Alba's dental practice earned $600,000 in taxable income. Susan maintains the home. However, she also assists in the bookkeeping of Alba's business but was not being paid. The family will pay approximately $210,000 in combined federal taxes.
Are there any tax-planning opportunities for Alba and Susan to minimize taxes for the overall family? ABSOLUTELY!
Unlike married couples, unmarried couples are treated as two separate taxpayers: each person has his/her own taxable income and tax rate schedules so such maneuvering of income from the higher to the lower bracket unmarried family member ( if such maneuvering can be legally justified ) will generally produce nice tax effects. As taxable income increases, the rate of tax on that additional income also increases. If the taxable income could legitimately be moved to the domestic partner with the lower taxable income, the overall taxes for the combined couple will be lower.
Let's say that Alba pays Susan for her bookkeeping work. A fair rate varies depending upon Susan's expertise and time, but assume a fair market value would be $20,000 per year. Now Alba gets a deduction for Susan's salary and payroll taxes. Together, the family pays federal taxes ( including the additional payroll taxes ) of approximately $205,000—a savings of $5,000!
Other benefits of this arrangement include:
—Susan may be able to put some of the $20,000 salary into a retirement plan to decrease overall income taxes by even more money!
—Susan paid social security taxes for working which allows her to receive social security benefits upon retirement.
—Susan reduces the risk that the IRS may impute a salary for Alba's payment of Susan's living expenses.
I do not need to emphasize that the benefits of marriage greatly outweigh any planning opportunities to not being married. Nevertheless, as one door closes, another one opens. Unequal treatment should not prevent you from stepping through that other door!
Thomas H. Franklin holds a CPA and a Masters of Science in Taxation degree from Northern Illinois University. His practice specializes in advising same sex and other unmarried couples on tax and other financial matters. As required under Circular 230, this written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. PLEASE SEEK A TAX PROFESSIONAL'S ASSISTANCE BEFORE ENGAGING IN ANY TAX PLANNING. You can look on his Web site, www.thomashfranklin.com . His e-mail is thomashfranklin@gmail.com and he welcomes all comments.
