When couples end a relationship, they are rarely thinking about the tax consequences associated with their decision. Although traditional divorce is generally not taxable, ending a domestic partnership, civil union, or gay marriage may have unexpected and painful tax consequences. To make matters worse, Internal Revenue Service guidelines that affect same-sex unions can be vague and difficult to navigate. Additionally, tax laws and rules change often. To protect the financial interests of both parties, gay couples and others ending a domestic partnership should be careful to make informed financial decisions ahead of time.
To illustrate what some are calling the gay divorce tax, consider how a couple’s assets are normally divided when they divorce. Oftentimes, a work-related retirement account in one member of the couple’s name is split between the parties. While divorcing heterosexual couples in California may divide the funds in the account equally using a Qualified Domestic Relations Order, same-sex couples cannot. Instead, unless the account owner has reached 59 1/2, he or she would be required to take a taxable withdrawal from the retirement account in order to divide the asset. In California, that means the withdrawal would be subject to both federal and state income taxes as well as a 10 percent premature distribution penalty. Unfortunately, that is before considering any potential gift tax issues.
Music star Melissa Etheridge made headlines when she discussed the high cost of ending her domestic partnership with Tammy Lynn Michaels. According to Etheridge, she was required to shell out twice as much money to end her union as would have been required if she were married. Like their heterosexual counterparts, gay couples in California and across the nation should discuss the possibility of divorce prior to entering into a legal union of any kind. Due to the host of complex issues associated with ending a civil or other legal partnership, same-sex couples must educate themselves ahead of time to ensure they make smart financial decisions. If you are considering entering into or ending a same-sex union in California, you should contact an experienced family law attorney who can help you protect your financial interests.
San Diego family lawyer Roy M. Doppelt has over 20 years of experience practicing family law in California. His practice includes assisting same-sex couples navigate both domestic partnership and marriage laws, helping them with child adoption procedures, and counseling couples through the difficult process of legal separation and divorce. Mr. Doppelt serves clients in Linda Vista, Encinitas, Scripps Ranch, San Diego, and throughout Southern California. For a Free In-Person or Virtual Consultation, call Doppelt and Forney, APLC toll-free at (800) ROY IS IT (769-4748) or contact us through our website.
Same Sex Relationships: Why You May Need an Attorney in San Diego, San Diego Divorce Lawyer Blog, October 18, 2012
Baby Boomer Generation Increasingly Choosing Late in Life Divorces in California, Nationwide, San Diego Divorce Lawyer Blog, October 16, 2012
Op-ed: Watch Out for the Gay Divorce Tax, by David Rae, The Advocate