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Tax Matters for Unmarried Couples

Tax Matters for Unmarried Couples

The number of unmarried couples who have lived together has increased over the years. While living with your partner might seem like a great way to cut costs, have you thought about the possible tax consequences? Read on to find out more.

Over the past ten years, the number of unmarried couples living together has increased dramatically. Some couples live together to test the waters of marriage, while others may live together to save money or start families without the stress of marriage. While there are some advantages to living with your partner, you can also have financial and tax issues.

Suppose you are in a same-sex relationship or partner but have not legalized your marriage in your state. If this is the case, you will need to file individual federal income tax returns as the federal government does not recognize internal or civil partnerships for marital tax benefits.

Tax deductions and credits

When a single couple lives together, the two must file an individual tax return at the end of the year. Historically, unmarried couples pay less tax because their income puts them in a lower tax category than married. For example, if both employees brought home $30,000 in 2016, each would be entitled to the 15% rate. However, if the couple is married and filed a joint tax return and one spouse claimed to be the HoH (head of the household), the annual tax rate of $60,000 would drop to 25%.

In 2019, the new tax law came into force, which radically changed the previous scenario. For someone who earned $30,000 in 2018, the tax interval is 12%. For a couple who filed together and earned $60,000, the tax bracket is still 12%, a significant difference from previous years.

Unmarried couples cannot file a joint income tax return. There is a small exception if your state recognizes your relationship as a legal marriage. For example, some states recognize a common-law marriage as a legal status, and if so, you may be able to file a joint state income tax return if you meet the requirements of customary law in your state.

Suppose you are in a same-sex relationship or partner but have not legalized your marriage in your state. In that case, you will need to file individual federal income tax returns as the federal government does not recognize internal or civil partnerships for marital tax benefit. You will need to contact your state's tax department to determine if you can file a joint tax return as a registered partner. For example, in California, registered domestic partners can file joint state returns.

Child Tax Credit

Unmarried couples can use the marital status of "head of household" if they have a dependent child. If your kid lives with you and your partner, either of you can claim the child tax credit as the head of the household, but only if you have provided at least 50% of the child's financial assistance.

You can also claim the credit only if your child has lived with you for the last six months of the fiscal year. Couples who file a joint tax return do not have to do so, as they will add the child to the completed tax form, and the calculations will be done on their own. That being said, in some cases, married couples with higher incomes may not qualify for the child tax credit.

Claim your partner as an employee

From 2017, eligible persons can declare their partner as dependent if the partner:

  • They did not provide support for themselves, which means that they provided more than half of the financial support of their partners during the year,

  • Earned below $4,050 in taxable income in 2017

  • Have lived with you all year as a member of your family.

  • Is not a "qualifying child" of another taxpayer (such as your partner's parent)

If your spouse has met the above guidelines, you may be eligible for the Employee Tax Credit, which can save you up to $4,050. However, after the 2018 financial year, the new tax law removed the personal and salary exemption, which means that you cannot claim your partner in the tax return—the employee exemption returns in 2026.

Although the exemption for employees is not available until 2026, you may be eligible for a tax credit of $500 (non-refundable) for dependents who are not eligible for the child tax credit. If you owe the federal government, the tax credit will reduce your tax burden, but it will not translate into a refund credit. It will no longer be available after 2026.

Mortgage and property interest deduction

Many unmarried couples own a house together, which can sometimes create complications when it comes to taxation. If you and your partner live together and the mortgage is in the name of only one partner, only the registered partner can claim a deduction for mortgage and interest payments, even if the unidentified partner has contributed or covered the payments.

Estate and Gift tax 

Couples are free to bequeath a significant amount of assets to their spouses without tax penalties. For example, if spouse A (John) dies and leaves all property to spouse B (Jane), spouse B can keep the assets without paying property tax.

The estate and gift tax exemption applies to goods offered while living or left at death for single people. The total value of the exemption almost doubled in 2021, so you can now donate up to $11.7 million without property taxes. This exemption amount will increase each year due to inflation.



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