Filing status of unmarried taxpayers living as a couple.

• Author: Garrison, Larry R.

Optimizing the Tax

Aspects of Cohabitation

While the Tax Reform Act of 1986 (TRA) generally lowered income tax rates for the average taxpayer, the Revenue Reconciliation Act of 1993 (RRA) increased such rates. For taxpayers filing jointly, the RRA reinstated the so-called "marriage penalty," i.e., the additional tax owed by married taxpayers over what would have been due if the taxpayers had remained single and earned the same income.(1) The RRA increased the severity of the marriage penalty for many taxpayers at various income levels, in part due to the increased progressivity of the tax brackets. As a result, taxpayers might consider alternatives to married filing jointly (MFJ) status. In addition, unmarried couples living together have become more common. This article discusses the determination of filing status, the definition of "marriage" under state and Federal law, and the planning opportunities for unmarried cohabiting taxpayers desiring to minimize their tax liability.

Marital Status - Federal Law

Sec. 7703(a)(1) provides that, for Federal tax purposes, the determination of whether a taxpayer is married is made on the last day of the year; for most individuals, this is December 3 1. Thus, if two taxpayers are married on December 31 of a given year, the couple is deemed married for the entire year and may file jointly for that year. They may also file as married filing separately, but this filing status usually results in a higher combined income tax than if the couple had filed MFJ.(2) Even though the taxpayers were unmarried for the majority of the tax year, neither taxpayer can use an unmarried filing status (i.e., single or head of household). Finally, under Sec. 6013(a)(1), a married couple cannot use MFJ status if one taxpayer is a nonresident alien.

Marital Status - State Law

* Common-law marriage

The determination of marital status for Federal tax purposes hinges on the definition of marriage under the law of the state in which the couple resides.(3) For an unmarried cohabiting couple, if their state of residence recognizes common-law marriage, the couple is married for Federal income tax purposes(4); if the state does not recognize common-law marriage, the couple is not married for Federal income tax purposes.(5)

Common-law marriage is a marriage not formalized in the usual manner. The couple usually has an agreement to marry followed by cohabitation. Generally, there must be a public recognition of the relationship on a continuing basis. Common-law marriage is recognized in 13 states (Alabama, Colorado, Georgia, Idaho, Iowa, Kansas, Montana, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina and Texas) and the District of Columbia.(6)

If the couple has an accepted common-law marriage in a state that recognizes such marriages, the "marital" status is not forgone by establishing residence in another state, whether or not the new state of residence recognizes common-law marriage.(7) Thus, the couple is married for Federal tax purposes.

Planning tip: A state may recognize common-law marriage and simultaneously allow a cohabiting couple to choose whether they want to be considered as married. In such case, the couple may decide not to file a joint return, but select an unmarried filing status if a lower tax results, which could occur if both taxpayers have taxable income and use the standard deduction. The total combined tax may be greater if the couple files MFJ than if they file as single taxpayers.

Obviously, the potential tax liability should be computed under different scenarios. When only one of the taxpayers in a recognized common-law marriage has taxable income, it is generally more advantageous for the couple to file MFJ.

* Same-sex marriages

Because the validity of marriage depends on local law, taxpayers of the same sex cannot be married for Federal income tax purposes if they reside in a state that does not allow same-sex marriage.(8) In such a state, while a "marriage" ceremony may have the suggestion of legality, the marriage is ignored for Federal income tax purposes.

Planning tip: One option in some jurisdictions might be for one adult taxpayer to adopt another. In this case, head-of-household filing status could be selected, with one adult taxpayer serving as the "parent."

* Annulments

If a marriage is void from its inception under state law, the Service considers the couple unmarried for the entire length of the "marriage."(9) As a result, the taxpayers must file amended returns reflecting single (or head-of-household, if appropriate) filing...