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Partner laws can cause tax puzzles

Published Dec. 3, 2006

No one needs to tell Anita Zubere about the legal and economic challenges of being in a domestic partnership rather than a marriage. She has learned from experience.

The 62-year-old Venice, Calif., hypnotherapist said she and her partner, Lisa Bartoli, 52, who have been together for 26 years, registered as domestic partners to recognize their union as much as California law allows.

And yet neither will ever be able to collect Social Security based on the other's work record. Nor can one take family leave when the other is seriously ill. Unlike a married couple, they can't transfer their assets to one another at death without tax consequences. Even filing income and property taxes is complex.

Domestic partnership is a relatively new legal status, mostly for gay and lesbian couples, as well as for elderly heterosexual couples who choose not to marry for practical reasons.

It confers many of the legal rights and responsibilities of marriage - including being responsible for the partner's debts. However, the status is recognized only in some states, including California, but not by the federal government.

As a result, where some challenges - such as not being able to visit a partner in the hospital - are diminishing for unmarried couples, the tax issues are getting more complicated, experts say.

Unfortunately, for the thousands of couples in states that legally recognize domestic partnerships, tax uncertainty is inevitable, said Alma Beck, a San Francisco tax attorney who specializes in domestic partnerships.

Consider the task of declaring a filing status on an income tax return. For most, that's simple - you're single, married or a single parent, which would make you a "head of household."

Gay and lesbian couples in California can't marry, but they can register as domestic partners.

Starting in 2007, registered domestic partners will be required to file California tax returns just as married couples do. In other words, they'll file jointly or check the "married filing separately" box.

However, the Internal Revenue Service has ruled that the federal Defense of Marriage Act, enacted in 1996, bars same-sex couples from filing jointly - or as married filing separately - on federal returns.

The bottom line: Domestic partners can either choose a tax authority to defy or file state tax returns that are completely different from their federal returns, Beck said.

Estate tax issues are equally troublesome, she said.

California's domestic partnership law recognizes each partner's equal right to the household's community property, but federal law does not.

Under current federal estate tax laws, for instance, married couples get a 100 percent exclusion from estate taxes. That means that when a man dies, his assets go to his wife without triggering a tax bill. It's only after the surviving spouse's death that estate tax becomes an issue.

With domestic partners, there's no comparable exclusion from estate taxes, Beck said.