Divorce & Taxes

With the ongoing debate over Proposition 8 in California concerning same-sex marriage in that state, the advantages of marriage are being discussed in the news again. One of the many reasons gay couples desire legal marriage status is the fact that all unmarried couples, regardless of sex, can suffer big tax penalties when they split up. Long-time couples who aren’t married are heavily disadvantaged when they split up and assets are transferred.

The tax advantage married couples enjoy is that they can pass any amount of assets to a spouse tax free. Pensions, 401k accounts and many other asset transfers are tax free when they take place in connection with a marriage ending in divorce too. But those advantages are not available to people who have lived unmarried together. Gay partners and anyone else lacking legal marriage status could end up with huge tax bills if they attempt to split commingled financial assets like a jointly purchased home or other real estate. Estate taxes and cash passed down to a relative or any other non-spouse will soon be subject to a whopping 55% tax rate on amounts over $1 million when the federal estate tax changes on Jan. 1, 2011.

Unmarried heterosexual couples and gay couples both face the same asset transfer tax problems, and in states where same-sex marriage is legal, both have the same solution available. The obvious solution to the problem of unmarried status is marriage. A quick marriage prior to a quick tax-free divorce solves the problem and provides the tax advantages needed.