State Tax Filing for Same-Sex Couples
The good news for many gay and lesbian couples: A growing number of states allow them to file joint state income tax returns. The bad news: The federal government and the states still have starkly different rules, which can make taking advantage of domestic partnership arrangements difficult at tax time. Here’s help to guide you through the nuances of filing as a couple—and finding the method that offers you the best tax advantages.
In Massachusetts, Vermont, Connecticut, and Iowa (where same-sex couples can marry) and in California, the District of Columbia, New Jersey, New York, and Oregon, (which recognize civil unions or registered domestic partners), qualifying couples can now file joint state income tax returns. However, that’s still not allowed at the federal level.
In California, certain unmarried heterosexual couples who live together can also register as domestic partners and file joint state tax returns. To qualify, one of the partners must be at least age 62. Filing a federal joint return with the IRS is prohibited for them as well.
But we're talking about state returns. Federal laws shouldn't come into play, right? Not exactly. Most states base their joint return computations on the figures from your joint federal return. This means same-sex couples and other domestic partners must complete a total of four tax returns.
- First, each partner must complete an individual federal tax return to file with the IRS.
- Second, the couple must create a mock or dummy joint federal return combining income, adjustments, deductions and credits.
- Finally, they use that mock return as the jumping off point to prepare a joint state tax return.
If you aren't allowed to file a joint federal return, but are required to file the equivalent of a married-filing-jointly or married-filing-separately return in your state, the first step is to be sure you understand the rules in your state. Here are the websites for your state’s tax department:
- District of Columbia
- New Hampshire (Dividends and interest only)
- New Jersey
- New York
TurboTax will greatly simplify the process of completing the mock federal return. Should you send that return to the state? That depends on where you live. Vermont, for example, wants to see it; the District of Columbia does not. TurboTax has special instructions to help domestic partners, those in civil unions and married same-sex couples complete their state returns.
If your state offers you the option of filing two single returns or filing jointly as a couple, a big question is whether filing a joint return on the state level will save or cost you money. Because so much has been written about the so-called marriage tax penalty , the possibility that a married couple pays more federal income tax than the combined total that husband and wife would owe if they were still single—you might assume you’ll pay more by filing jointly. That’s not necessarily so. (Even at the federal level for example, more couples enjoy a marriage tax bonus instead of a marriage tax penalty.)
To find out for sure which filing method is better for you and your partner, you’ll need to calculate your taxes BOTH ways: filing jointly and filing two single state returns Using TurboTax can make it much easier to test different filing scenarios without spending a great deal of time on it.