From
Your Perspective:
Financial planning for nontraditional couples
Tax issues
for nontraditional couples
One major benefit of a traditional marriage is the right that spouses who are both U.S. citizens have to transfer
assets
to each other while they are both alive and at the time the first one dies without owing any
gift
or
estate tax.
(Special rules apply when one spouse is not a U.S. citizen.) But that’s not the case if you and your partner aren’t married.
Once the value of a gift exceeds the annual exempt amount — $12,000 in
2006 — the cost accumulates against your lifetime gift exemption of $1
million. For instance, if your partner pays for a car and you register
it in your name, it may be considered a taxable gift. Similarly, if you
leave an estate worth more than $2 million, taxes will be due on the
excess over that amount, though nothing would be due if you were
married.
On another front, if your job offers health benefits to your domestic
partner, those benefits may be taxable income. And if you lend your
partner money for whatever reason, you may have to pay tax on imputed
interest — or what you should have charged for the use of the money.
These potentially costly situations can be difficult to negotiate on
your own. You and your partner might want to consult with a
professional tax adviser before you begin consolidating your financial
lives, to avoid inadvertently triggering big tax bills.
Even if a state
recognizes a nontraditional union as a civil marriage, federal
tax law may still treat the individual partners as single.
That said, some unmarried partners may actually benefit from
not being married, since they may be able to avoid the marriage
penalty — a quirk in the tax law that leaves couples
earning approximately equivalent salaries paying more in
income taxes after marriage than they would have paid if
they had stayed single.
Tax reduction strategies
You may be able to lighten your tax burden by shifting taxable
assets from the partner with the higher tax rate to the
partner with the lower tax rate. But before you do, you’ll
want to consult a tax adviser. You don’t want the
strategy to backfire by triggering gift taxes.
