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Tax Considerations for Unmarried or Same-Sex Couples

As complex and intimidating as taxation can be for most people, it’s even trickier for unmarried and same-sex couples, as there are additional pitfalls to look out for.

Estate Tax and Gift Tax

Property that passes from one spouse to another is not subject to estate or gift taxes. Unfortunately, for couples the IRS considers to be unmarried, when one partner inherits property from the other, the unlimited marital deduction does not apply.

The takeaway: For unmarried or same-sex couples with assets beyond the exemption amount, efforts to minimize estate taxes become even more important than they are for other couples.

Inheriting an IRA or 401k

The rules for an inherited IRA are different for a spouse beneficiary than for a non-spouse beneficiary.

Specifically, as a non-spouse beneficiary, you have to begin taking required minimum distributions (RMDs) in the year following the death of the original account owner — no matter how old you are. (In contrast, spouse beneficiaries can simply roll the inherited IRA into their own IRA and treat it as if they were the original owner all along.)

Takeaway: Don’t forget to take RMDs from an inherited IRA.

Early IRA Withdrawals

The rules for withdrawals from an IRA allow you to avoid the 10% penalty if you’re using the money to pay for higher education expenses or unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. And, for most couples, the same exception applies if you’re withdrawing money to pay for your spouse’s medical or education expenses.

But again, because same-sex couples are not considered married, any IRA distributions used to pay for your partner’s expenses will be subject to the 10% penalty (unless, of course, you meet some other exception).

Takeaway: If you need to withdraw money from an IRA to pay for such expenses, be sure to take it out of the right partner’s IRA!

Have a Will, and Name Your Beneficiaries

This last point isn’t exactly a tax consideration so much as a general estate planning consideration. In short, for same-sex or other unmarried couples, a will becomes absolutely essential — even more so than for other couples.

The reason is that (in most cases) if somebody dies without a will, his or her assets pass on to his closest relatives. And, therefore, if your state doesn’t consider you to be married, your partner could inherit nothing if you die without a will, as everything will pass to your blood relatives.

Similarly, be sure to name your partner as the beneficiary for your IRA or retirement plan at work if you want to ensure that he or she will inherit those assets when you pass on.

For More Information, See My Related Book:

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Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

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