5 Ways Domestic Partnership Can Affect Your Finances
When New Jersey’s same-sex marriage ban was struck down last year, two of accountant James Wood’s clients were ready to join the rush to City Hall. His advice? Wait.
Why? One of the same-sex partners had just adopted the other partner’s child, and if they got married in the same year, the new parent would lose an adoption tax credit of up to $12,970.
“That’s one situation in which domestic partners have a unique advantage over married couples,” explains the Hillsborough, N.J.–based CPA. “Married couples don’t qualify for the tax credit when one spouse adopts the other spouse’s children.”
This is just one of the myriad unique challenges—and opportunities—domestic partners face with their financial planning, Wood says. Key among them is the fact that partners, whether of the same or opposite sex, lack many of the legal rights that are automatically granted to spouses in the event of divorce or death.
So if you’re in a domestic partnership, or considering one, you and your loved one should plan a little more carefully in these five financial areas to protect each other both financially and legally.
Here’s one bit of good news: Probably the single biggest advantage unmarried couples have over their married counterparts is greater flexibility in filing their income taxes, Wood says. “The marriage penalty doesn’t apply to domestic partners, so they can do substantially better from a tax perspective by filing as single heads of household.”
For example, if you own a home with your domestic partner, you can choose to split deductions evenly or assign them to the partner where it is most beneficial. Or you can decide from year to year who will itemize the tax deductions allowed for your joint household, such as mortgage interest or real estate taxes, and who will take the standard deduction based on his or her individual income. This is particularly attractive for couples in which one partner is the primary breadwinner, because it allows them to pay fewer taxes than would a married couple. “And domestic partners can do even better if they have children together,” he says.
Here’s how: Consider an unmarried couple with two children. Since they have no legal standing as a couple, each person can claim one child and file as head of household, enjoying all the itemized deductions or credits that may come with having a child. Or you can mix and match. If one partner makes a lot more money than the other one in a given year, he or she can claim both children and take the itemized deductions. If the roles are reversed the following year, the two partners can switch off. “As long as they are both the legal parents, they can transfer deductions to take the best advantage of the tax code,” Wood says.
One downside to all this flexibility with taxes, though, is just researching all your options, and it’s a good idea to work with a tax professional to figure out what combination of deductions and credits can work for both of you.