Same-sex couples appear to be at an inherent disadvantage when it comes to filing federal taxes, since they cannot utilize all of the same tax credits and deductions enjoyed by heterosexual married couples who file jointly. Early this year, the U.S. Tax Court limited the mortgage interest deduction amount for Charles Sophy and his domestic partner Bruce Voss holding amount of indebtedness deductible applied to the property not each individual taxpayer.
But certain provisions in the tax code actually put same-sex couples at an advantage, because the individuals in these relationships can benefit from one another in ways that heterosexual couples are legally forbidden.
To break it down a bit more, the Internal Revenue Code assumes that people with shared financial interests may try to use one another for tax advantages, such as by transacting business with one another. For this reason, the Code contains numerous provisions that forbid related people from taking advantage of such transactions. But still as of 2012, the Code does not recognize same-sex married couples as being related, and so they are not subject to such provisions. This opens up a world of opportunities.
“Gay marriage by itself never invokes any related-party rules –taxpayer-favorable or anti-abusive,” wrote Thedore Seto, Professor of Law at Loyola Law School Los Angeles and author of The Assumption of Selfishness in the Internal Revenue Code: Reframing the Unintended Tax Advantages of Gay Marriage.
In the article Seto provides a number of examples. One such example, if you try to sell property that has risen in value, you must report the entire gain to the IRS. But if a woman in a same-sex union first buys the property from her partner using a genuine bank note, she can then sell the property to a third-party buyer for cash, pay off the debt and walk away completely even, without having to pay tax on any of the appreciated value. For large property transactions, this can save same-sex couples a fortune. Heterosexual married couples cannot get away with this, according to Section 453(e) of the Internal Revenue Code.
Another example relates to debt. If you have a discharged debt, the Code requires you to claim the discharge amount as income. For example, if you have a $10,000 debt, and your creditor agrees to settle the debt for $2,000, you must claim the difference of $8,000 as income. But same-sex married couples can get around this. A partner in a same-sex marriage can “buy” the debt from the indebted partner, paying off the creditor. The transaction is no longer considered as income, but rather as a purchase.
Same-sex couples can also receive childcare advantages. Section 21 of the Code allows taxpayers to claim a credit of between 20 percent and 35 percent of childcare service costs, usually for taking care of children under the age of 13. Though the Code does not permit heterosexual married couples to “hire” one another for childcare services, the Code once again does not recognize same-sex couples in the same way. So if you have a same-sex partner, you can essentially hire him to care for the children, and claim a small percentage as a tax credit.
So even though the odds may appear as though they are stacked against same-sex couples when it comes to federal income tax, such couples are in fact in an ideal position to reap some of the most useful tax benefits available.