Some same-sex spouses in California get better tax treatment than married couples

Just a quick follow-up to an earlier post about some of the few advantages for same-sex spouses in the tax code. This one generally only applies to same-sex spouses and Registered Domestic Partners in community property states, though it also might apply if both spouses are high earners with similar income in separate property states. (Currently the three community property states that recognize same-sex marriage or registered domestic partnerships are California, Nevada, and Washington.)

If you’re lucky enough to have a high income while in a RDP relationship or same-sex marriage, you can avoid the dreaded “marriage penalty.” The marriage penalty refers to the fact that when taxable income exceeds $137,300 for a married couples, their tax liability is actually higher as a result of being married than it would be if each spouse filed single and reported half of the total income. (Note: Married couples can’t get around this by simply filing separately; the tax brackets are even worse for people using the Married Filing Separate filing status.)

However, if you’re married to a same-sex partner and living in a community property state, then federal law requires you to file using Single filing status, and report half of the combined income of you and your spouse. In other words, you get to use the optimum reporting method for recognizing your joint income…a method that makes your taxes lower than what they would be if the government recognized the marriage. This also works for same-sex partners in separate property states if both partners have relatively high incomes, say above $90,000 or so depending on the deductions claimed.

Here’s a very simple example: Imagine a married couple with total household income of $300,000. To keep this very simple, we’ll assume they have no deductions except the standard deduction and personal exemptions.** In this simple example, the married couple would have a total Federal tax liability of $70,714 if they file a joint return. However, if this married couple is of the same sex, and their marriage isn’t recognized by the federal government, then each spouse reports $150,000 of income on a tax return using the Single filing status. In this case, each taxpayer has a tax liability of $33,091. So the combined household tax liability is only $66,182…a savings of almost $5000 over the couple whose marriage is recognized by the Federal government!! And the higher the income, the more pronounced the effect. As mentioned above, the effect starts when taxable income (total income minus deductions) exceeds $137,300 combined for the couple.

To repeat what I stated in my earlier post on this topic, I must admit I’d much rather be able to simply help my same-sex spouse clients to file a Married Filing Joint return. The benefits of being treated equally I’m sure far outweigh the financial benefits of some loopholes in the tax code. But until that happens, I’m happy to find every loop hole I can to help same-sex partners get every benefit legally available.

Who knows? Maybe those opposed to same-sex unions will be so outraged when they find out about these “benefits” that they’ll realize what a waste of time and energy it is to try and create two separate classes of legal unions between people who love each other.

**If you’re familiar with California and itemized deductions, you probably realize how absurd it is to assume itemized deductions for a household earnings $300,000. Yeah, I know, it’s for simplicity, OK? The principle described here works just as well for a household with a bunch of deductions.

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2 Responses to Some same-sex spouses in California get better tax treatment than married couples

  1. […] for what you can really learn about a topic from blogs. (See here for the main overview, and here, here, and finally here.) More guidance is available in IRS Publication 555, but as we’re about to […]

  2. […] High income earners? If both spouses earn six-figure incomes (or higher), you’ll probably benefit from better tax brackets than married couples filing jointly. This also applies if there is one high earner in a community property state (e.g. California). More on that here. […]

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