Internal Revenue disservice: tax time reminds same-sex couples how antigay bias can really hurt your bank account. (Finance).
Ian was and still is a lawyer, earning what he calls "a comfortable salary," and Daniel was a doctoral candidate who earned $6,000 a year. "Had our marriage been legally recognized," Daniel says, "we would have been able to file jointly, and we would have received a larger tax deduction."
The couple's taxes became even more complicated and even more unequal to those of married straight couples in similar situations when they adopted their son, Eliezer, in 2001. "For the first year I spent a lot of time at home with Eli and I wasn't working," Daniel explains. Not only couldn't the couple file jointly, to combine Daniel's low income with Ian's higher one to thus be taxed at a lower rate, but "we weren't eligible for the full child tax credit," Daniel explains. "But we would have been eligible if we were legally married."
Situations like theirs are repeated in tens of thousands of lesbian and gay households across the country, where federal laws deny the fiscal realities of many same-sex couples. "Same-sex couples want to be able to live their lives as married," says Los Angeles tax lawyer Steven Weissman, "but the tax code really discourages you from being able to do that."
So while politicians carp about the federal tax code's so-called marriage penalty, which causes some legally married couples to pay more taxes than they would if they filed as two singles, many gay and lesbian couples suffer a particular form of tax discrimination--call it the "no legal-marriage penalty." They're simply not recognized in the tax code as economic units.
The problem is particularly pronounced in households where one partner makes significantly more than another. "If one person stays home with the kids and the other works, the couple will pay more taxes than a similarly situated married couple with kids," explains Pat Cain, a University of Iowa law professor and an expert on the tax code's impact on same-sex couples. Moreover, same-sex couples encounter considerable tax discrimination in the event that one partner dies and leaves his or her retirement savings or estate to the other.
Not to say that some lesbian and gay couples don't fare better than legally married couples under the current federal income tax structure. "With couples who are not legally married, if you have two professionals who make $100,000 each and a married couple that makes $100,000 each, the married couple will pay more in taxes," says New York certified public accountant Tina Salandra.
But that fact just highlights the inequity in the law, Cain says. "Straight people can choose to get married or stay single, depending on what's advantageous for them taxwise," she says. "For gay people, there's no choice."
According to Internal Revenue Service spokesman Anthony Burke, same-sex couples are barred from filing joint returns because "the determination of marital status for federal income tax purpose is made in accordance with the law of the state of the marital domicile."
In other words, states determine whether a couple is legally married, and because no state recognizes marriage between two people of the same sex, the IRS won't either. Vermont couples joined under that state's civil unions law have the option of filing state taxes as either "Civil Union Partner Filing Jointly" or "Civil Union Partner Filing Separately," but civil unions are not recognized by the federal government.
Because the IRS and most states don't recognize lesbian and gay families, numerous potentially discriminatory practices are set in motion, says attorney Kate Kendell, executive director of the San Francisco-based National Center for Lesbian Rights. Not only does the law view economically interdependent couples as single filers, but in most of the country, children born to or adopted by one member of a couple can't be legally recognized as the children of the other member of a couple, Kendell says.
That means nonlegal spouses who financially support their partners and kids can't always claim them as dependents and can't claim certain sizable tax credits that apply to parents. In some cases, the IRS might, on one part of a tax return, view a child of a nonlegal parent as a foster child or dependent, but might not on another. "It's not at all uncommon for the IRS to have these disjointed definitions," says New York City tax attorney Victor Voloshin, "and you can't necessarily use the commonsense definition of the term."
In one section of the IRS code, for instance, a foster child (who can be claimed as a dependent) is described as one "who is in your care [and whom] you care for as your own child. It does not matter how the child became a member of the household." But for the purposes of the child tax credit, which cuts $600 per child off the cost of each tax bill, a foster child is only a "child placed with you by an authorized placement agency.'
Another area of clear discrimination is in domestic-partner benefits, Voloshin says. Straight employees are not taxed for the health benefits and other fringe benefits--such as free flights, in the case of airline employees--enjoyed by their legally recognized family members. But gay employees must pay tax on the benefits afforded their partners.
Still, probably the greatest inequality involves the estate tax, Weissman says. "Bill Gates could die and leave all his money to his wife with no estate tax," he says. In fact, when one member of a legally married couple dies, all of his or her assets--real estate, other property, stocks and bonds, intellectual property, life insurance proceeds--can go tax-free to the surviving spouse. The same is true for retirement savings, such as IRAs and 401(k)s, which can roll over and continue to accrue interest until the surviving spouse decides to withdraw the funds.
But when a member of a same-sex couple dies and leaves his or her estate to the surviving partner, the estate tax is invoked. Currently, the first $1 million of any estate is exempt from taxation. After that it's taxed at a rate between 43% and 49%. One million dollars might seem like a lot of money, but given real estate prices in many urban and suburban areas, it's not uncommon for many middle-class couples to have estates worth much more than that.
Similarly, surviving same-sex partners can't roll over their late spouse's retirement savings. Usually, they are cashed out and taxed as income on the surviving partner's income tax return. "That can sometimes hugely increase the surviving partner's income for the year the money is received, and means they'll be taxed at a much higher rate than they would ordinarily," Voloshin says.
So what hope is there for gay and lesbian taxpayers? Congress could rewrite the tax code, but that doesn't seem likely anytime soon. In addition, if there were a successful court challenge filed by a Vermont couple in a civil union, that might force favorable changes. "I think there's a real case to be made," Cain says.
For now, though, tax experts recommend that couples who can afford it consult with tax and estate planners. "Planning ahead can make things a little more equitable," Voloshin says.
As for the Chesir-Teran family, this year, "chances are, we're going to be saving money" by not being able to file jointly, Daniel says. "But I very much want the full rights and responsibilities of a fully recognized married couple and family," he adds. "Even if some years I have to pay more."
RELATED ARTICLE: Do domestic partners benefit?
How six same-sex couples would fare under the 2002 tax code
The IRS groups taxpayers into four different categories and taxes people in these categories at different rates. The categories are "Single," "Married Filing Jointly," "Married Filing Separately," and "Head of Household." Married Filing Separately has the highest tax rate, followed by Single, then Head of Household, and Married Filing Jointly. Here's how several fictional same-sex couples would fare under these groupings:
Jon ($25,000) and Alvin ($15,000)
Jon is a musician who pieces together a living playing gigs and giving music lessons. His partner, Alvin, used to be a manager of a retail store but recently lost his job. They rent their apartment. Jon's federal taxes amount to $2,295; Alvin's are $795. Combined, they owe the IRS $3,090. Had they been able to file jointly as a married couple, they'd owe the IRS $3,322.50, $232.50 more than they do now.
Josie ($40,000) and Arlene ($0)
Josie is a journalist. Arlene is earning her bachelor's degree. They rent their apartment. Filing individually means that Josie pays the IRS $4,545; Arlene, of course, owes nothing. Were they able to file jointly as a married couple, they'd owe $3,322.50, $1,222.50 less than they do now.
Kisha ($45,000) and Sarah ($0)
Kisha and Sarah are the parents of two girls. Sarah, the biological mom, stays home with the kids. Kisha teaches in the public schools. In the state where they live, Kisha isn't able to become a legal parent through second-parent adoption. Because Sarah and the kids have no income, Kisha can claim them as dependents and can file as a head of household, which puts her in a lower tax bracket than if she filed singly. But because Kisha and Sarah can't legally marry, Kisha can't claim the $1,200 child tax credit she'd qualify for otherwise. Under the current system Kisha owes $3,415 to the IRS; had they been able to file jointly and to claim the child tax credit, they'd owe only $1,972.50.
Tammy ($18,000) and Cheryl ($16,000)
Both Tammy and Cheryl work at Wal-Mart. They have two school-age kids. Tammy is the legal parent of both kids. As a low-income parent she's entitled to receive the Earned Income Tax Credit, a federal tax rebate for low-income working families and individuals. Filing as a head of household, Tammy will receive $3,191 from the IRS. Cheryl, who must file as an individual, owes $945 in taxes. Thus their household receives a rebate of $2,246. Had Tammy and Cheryl filed jointly, they'd owe $290.
Larry ($75,000) and Arthur ($60,000)
Larry is a lawyer, and Arthur is a nurse. Larry is covered under Arthur's health insurance. The additional premium costs $1,800 a year. They own their home as joint tenants, paying mortgage interest of $11,700 a year and real estate taxes of $3,000. The IRS has not made clear whether the money Arthur pays for Larry's health insurance is taxable. Assuming it's not and that they split the cost of the mortgage interest and their real estate taxes, Larry owes $13,801.50 as an individual; Arthur owes $9,751.50. Their household tax bill is $23,553. Had they filed jointly, they'd owe $24,700.50.
Brian ($&35,000) and Joe ($22,000)
Brian is a computer programmer. Joe is a management consultant who started staying home when they adopted their son in 2002. Because they live in New York, they are both recognized as legal parents. They own their home jointly, paying $20,280 a year in mortgage interest and $4,000 in real estate taxes. They paid $22,000 to adopt Jacob. Assuming Brian paid all of the mortgage interest and real estate taxes, he'd owe $13,521--$23,521 as a head of household minus the $10,000 tax credit he got for adopting Jacob. Joe owes $1,845. Their combined household tax bill would be $15,366, compared to $17,226.50 if they'd filed jointly.--L. G.
Galst has also written for New York magazine, Mother Jones, and The Village Voice.
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|Publication:||The Advocate (The national gay & lesbian newsmagazine)|
|Date:||Apr 15, 2003|
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