Unequal Taxation and Undue Burdens for LGBT Families
Federal Tax Laws Need Update to Accommodate Contemporary Families
SOURCE: AP/ Charles Krupa
As millions of Americans rush to file their tax returns by midnight tomorrow, many taxpayers who are lesbian, gay, bisexual, or transgender, or LGBT, will realize that outdated and discriminatory laws are inflating their families’ tax bills. And legally married same-sex couples will be forced to state that they are single and file separate tax returns because the Defense of Marriage Act, or DOMA, prohibits the federal government from recognizing their marriages.
The federal government provides important tax credits and deductions that are designed to ease the financial burdens of raising children. In 2010 combined expenditures for family-related tax credits and deductions comprised approximately one-third of all federal spending on children, and totaled more than $133 billion, including tax deductions and cash payments refunded directly to families. The Tax Foundation estimates that an American family with an average income receives approximately $16,781 in such tax relief from the federal government each year.
But most of these tax policies are designed and maximized for families headed by two married, heterosexual parents. Indeed, federal tax law has not kept up with contemporary families who are raising children in diverse families headed by single parents, unmarried couples, and extended family members. Parents may be heterosexual or they may be LGBT.
In October 2011 the Movement Advancement Project, the Family Equality Council, and the Center for American Progress released the report, “All Children Matter: How Legal and Social Inequalities Hurt LGBT Families.”* The report offers one of the most comprehensive portraits to date of LGBT families in the United States and details ways in which antiquated laws and stigma harm children.
This column summarizes “Unequal Taxation and Undue Burdens for LGBT Families,” which is an updated supplement to the “All Children Matter” report. Focusing specifically on the income tax inequity faced by LGBT families, “All Children Matter” includes recommendations for amending, repealing, or overturning archaic and discriminatory laws that have a disparate economic impact on children simply because their parents are LGBT.
In this column we first provide an overview of the diversity of LGBT families: who they are, where they live, and the economic and legal realities they face. Next, we discuss how federal tax laws and definitions of family contribute to unequal taxation and undue tax burdens for LGBT families. We conclude with commonsense recommendations for ensuring that all families, regardless of whether parents are heterosexual or LGBT, are treated equally and can access the full array of child and family-related tax exemptions, deductions, and credits designed to benefit taxpaying families raising children.
LGBT families are part of the American fabric
America’s families are changing. Today just 67 percent of children live with married heterosexual parents, down from 83 percent in 1970. Approximately 2 million children are being raised by LGBT parents, and that number is expected to grow in the coming years. A recent survey found that 38 percent of transgender Americans identify as parents. LGBT families are geographically dispersed, living in 93 percent of all U.S. counties.
Although states like California and New York have high numbers of same-sex couples, same-sex couples are most likely to raise children in Mississippi, followed by Wyoming, Alaska, Arkansas, Texas, Louisiana, Oklahoma, Kansas, Alabama, Montana, South Dakota, and South Carolina. It is important to note that half of these are states where more than one in four children live in poverty and that all of these states are also among the very lowest in terms of LGBT legal equality.
In 2010, 22 percent of all American children lived in poverty, with the same percentage of children living in “food insecure” households (homes in which families worried about having enough food). Contrary to stereotypes, children being raised by same-sex couples are twice as likely to live in poverty as those being raised by married heterosexual parents.
LGBT families are also racially and ethnically diverse—more so than married, heterosexual couples raising children. Same-sex couples of color are more likely to be raising children than white same-sex couples. For instance, 33 percent of black male same-sex couples and 23 percent of Latino male same-sex couples are raising children compared to only 6 percent of white male same-sex couples. Forty-seven percent of black female same-sex couples and 42 percent of Latina same-sex couples are raising children compared to only 23 percent of white female same-sex couples raising children.
More LGBT families live in households with adopted children, stepchildren, and nonrelated children than married heterosexual couples. Why? Depending on how LGBT families are formed and where they live, LGBT parents may not be able to secure legal relationships with their children, or in some circumstances, may only be able to do so by adopting their own children. By contrast, when a child is born to a married heterosexual couple, that child is generally recognized by all 50 states as the legal child of both parents.
While all states allow married heterosexual couples to adopt jointly, same-sex couples (and unmarried heterosexual couples) face uncertainty in 28 states and are effectively banned from adopting jointly in five states. In states that prohibit joint adoption by same-sex couples, one LGBT parent may adopt as a single person, but this leaves the child with only one legal parent. In some cases, the other parent may be able to secure legal ties using a process called stepparent or second-parent adoption. These mechanisms, however, are only available in 19 states—the vast majority of which already support joint adoption by same-sex couples. States which ban joint adoption by same-sex couples also do not offer stepparent or second-parent adoption for same-sex parents.
The federal tax return is an annual encounter with inequality
The federal income tax system began incorporating marriage and family-based incentives and tax credits as early as the Revenue Act of 1913, which included a $1,000 deduction for married couples. Since that time, federal law has continued to establish additional tax benefits for families, including the earned income tax credit, or EITC; the child and dependent care credit; the adoption credit; and the child tax credit.
Although the federal tax code has continued to provide tax incentives for married couples and families, there is no unified federal family law or domestic relations law articulating family-related definitions. As a result, historically the Internal Revenue Service, or IRS, has deferred to state law determinations of marital status and legal parentage. For instance, under current law, heterosexual couples who live together in states that recognize common-law marriage are considered “married” by the IRS if the state recognizes the marriage.
The Defense of Marriage Act, passed in 1996, prohibits the federal government from recognizing the legal marriages of same-sex couples and allows states to refuse to recognize same-sex legal relationships that have been recognized as marriages by other states. The law specifically defines “marriage” as “a legal union between one man and one woman as husband and wife.” Likewise, it defines the word “spouse” as “a person of the opposite sex who is a husband or a wife.”
Several federal courts have ruled the law unconstitutional, yet it remains in effect until repealed by Congress or struck down by the U.S. Supreme Court. As a result, federal tax law is also subject to DOMA’s definition of “marriage” and “spouse,” meaning the federal government does not recognize the legal relationships of same-sex couples, even in the 15 states and the District of Columbia that now offer marriage equality or comprehensive relationship recognition.
For many LGBT families, this lack of recognition creates a yearly encounter with inequality that amplifies the economic burdens for their families. The biggest problems and challenges include:
- LGBT families pay more: From taxation on family health insurance benefits to incurring additional gift and estate tax liability, LGBT families pay more taxes because they do not count as “spouses” under the federal definition.
- LGBT families are denied joint filing status and accompanying tax relief:Since married LGBT families are not legally recognized by federal law, they cannot receive the significant tax advantages of the “Married Filing Jointly” tax status, which means they have less money to meet the financial needs of their family. LGBT families can only file as “Single” or at best, “Head of Household,” even when they are married or in other legally recognized unions and partnerships.
- LGBT families lose important deductions, exemptions, and credits and as a result pay more in taxes: Because joint and second-parent adoption are not available in the majority of states, one LGBT parent often lacks legal ties to his or her children, which makes it hard, and sometimes impossible, to claim important child-related deductions and credits, particularly when that parent is the primary wage earner in the family.
- LGBT families must misrepresent and “carve up” their families: Parents are forced to decide which parent “claims” their children for exemptions. To gain tax relief, some families must split their children between different tax returns. Other LGBT parents can only claim their children as “qualifying relatives,” or not at all. Heterosexual married families can simply file jointly, account for all children on one form, and check the exemption boxes.
- LGBT families face heightened scrutiny, extra costs, and refund delays: LGBT families must run multiple tax scenarios, create “dummy” federal returns, submit extra paperwork, and face audits and denials of legitimate tax credits.
Further, the government gives most American families a range of tax exemptions, credits, and deductions to help offset the costs of raising a family. Below we discuss the primary exemptions, credits, and deductions and how they impact LGBT families
- Tax exemptions for spouses and dependents:In general, a taxpayer is allowed to claim one exemption for herself, one for a heterosexual spouse (if filing jointly and regardless of the spouse’s income) and one for each “qualifying child” or “qualifying relative.” For the 2011 tax year, each dependent reduced the taxpayer’s taxable income by $3,700, lowering the taxable income of a family of four by $14,800. For a family of four with an income of $45,000, this would reduce the tax due by about $2,220.
LGBT families can be at a significant disadvantage when it comes to claiming exemptions. Unlike married heterosexual couples an LGBT parent cannot claim an exemption for a same-sex partner/spouse unless that person meets the narrow definition of “qualifying relative.” An LGBT parent with legal ties can claim the child as a “qualifying child” but a parent without legal ties can only claim the child as a “qualifying relative” or may be unable to claim the child at all if the other parent has done so on a separate tax return.
- Credit for child and dependent care expenses: Working or job-searching heterosexual taxpayers who pay someone to care for a “qualifying child,” “spouse,” or other “qualifying relative” may be eligible for the child and dependent care credit. These taxpayers can reduce the amount of tax they owe by a percentage (which varies based on income) of total care costs (for tax year 2011 up to $3,000 for the care of one child or spouse and $6,000 for the care of two or more children or a spouse and children). To be eligible the “qualifying child” must be under the age of 13 or the spouse, older child, or “qualifying relative” must be physically or mentally incapable of self-care.
Because the credit only applies to care for “qualifying children” or “qualifying relatives” (in limited situations), on tax returns where an LGBT parent is not able to claim the children as a “qualifying child” or a physically or mentally incapable “qualifying relative,” the credit cannot be applied even if that parent pays the child care costs.
- Education-related deductions and credits:The IRS offers a variety of tax credits, deductions, and savings plans to assist families with the expense of education. Several mechanisms are available for taxpayers, including reducing the amount of income tax that a taxpayer may have to pay (via tuition and fees deductions or credits such as the American Opportunity Credit), accumulating tax-free interest for education-related savings plans, or receiving tax-free education benefits (for instance, from an employer).
As an example, a married heterosexual couple filing jointly for tax year 2011 can reduce their taxable income by deducting up to $4,000 in tuition expenses and mandatory enrollment fees for any family member.
Because LGBT families cannot file jointly, only a parent who is able claim a “qualifying child” or “qualifying relative” can claim a similar deduction. This is true for many of the other credits as well. In LGBT families where both parents are required to file, if a “Single” filing parent claiming no children or spouse has paid the education expenses for the other parent or for their child, these deductions and credits are completely unavailable.
- Child tax credit and additional child tax credit: The child tax credit reduces taxes due by up to $1,000 for each child under the age of 17. The amount of the credit is reduced for those who earn more than a certain income level: A single person’s tax credit begins to decline once his or her income reaches $75,000, while a married couple’s credit declines once their combined income reaches $110,000. For lower-income families who are unable to use the full credit to offset tax due, the additional child tax credit allows a portion of the credit to be refundable, even when no tax is owed.
LGBT families face two primary hurdles when it comes to the child tax credit. First, because LGBT families are not recognized by the IRS, it is possible that a family may not receive the full child tax credit even though their combined household income is less than $110,000. The following example illustrates this problem.
An LGBT family has one parent that makes $80,000—making him ineligible for the full child tax credit when filing as “Single.” The other parent has no income. If they were able to file as a married couple, this couple would be eligible for the full child tax credit. Instead, neither parent can access the credit.
Second, because this credit is only available for “qualifying children,” a parent who has not been able to establish legal ties may not claim the child tax credit even if this parent has claimed the child as a dependent using the “qualifying relative” status. Both of these obstacles decrease the availability of the credit and increase the family’s overall tax burden. A married heterosexual family filing jointly with the same income encounters none of these barriers.
- Earned income tax credit:According to the U.S. Census Bureau, the earned income tax credit lifted more than 3 million children out of poverty in 2010. The EITC is a fully refundable credit, which means that even when a family has no taxable income, the EITC can result in a refund check from the IRS. In addition to the federal EITC, 23 states and the District of Columbia have state EITC programs, and a recent study found that half of all families with children receive the EITC at some point.
Depending on the family’s financial situation, an LGBT parent filing as “Single” or “Head of Household” may find it easier or more difficult to qualify for the credit than to qualify if the family filed jointly. Because this credit is only for “qualifying children” (not “qualifying relatives”), only a parent with legal ties (biological parent, adoptive parent, or stepparent) may claim the credit. This means that low-income LGBT parents who do not have legal ties cannot access this critical tax relief when filing.
- Adoption credit: In tax years 2010 and 2011, the adoption credit was the largest refundable tax credit available to taxpayers. For tax year 2011 a family adopting a child under the age of 18 could deduct all qualified adoption expenses up to $13,360 including state-imposed fees, attorney’s costs and fees, home-evaluation fees, and filing fees. In 2012 the credit was changed to a nonrefundable credit, which means that while it can reduce the amount of taxes owed, it cannot result in a refund.
Married heterosexual couples must file a joint return in order to claim the credit, which cannot be used for expenses associated with the adoption of a spouse’s child (stepparent adoption). LGBT parents cannot file jointly, but since their relationships are not federally recognized as “married” and “spouse,” they can still access the credit when filing as “Single” and “Head of Household.”
For LGBT families the credit can be used to offset the costs for both joint adoption and second-parent adoption, but must meet the following requirements: the costs cannot exceed a total of $13,360 per child, the person seeking the credit must have incurred the expenses directly, and the adoption decree must have the filer’s name listed as the adoptive parent. This tax credit is not available to parents who complete an adoption through a surrogate parenting arrangement.
Recommendations and conclusion
The full-length “Unequal Taxation and Undue Tax Burdens for LGBT Families” report offers broad recommendations that would strengthen legal ties for all LGBT families and reduce the resulting economic inequities that these families face. These recommendations include legally and federally recognizing marriage for same-sex couples, as well as legally recognizing LGBT families by passing comprehensive parental-recognition laws. Below, we offer tax-specific reform recommendations that would help eliminate tax inequities LGBT families face. More detailed recommendations can be found in the full-length companion report
Tax-related policy recommendations for LGBT families
LGBT families should be treated equally by federal and state taxing authorities. Targeted recommendations designed to remedy the existing inequities and allow LGBT families to benefit from the family-focused tax advantages and incentives available at the federal and state level include:
Create a designation of “permanent partner”:The IRS should create a designation of a “permanent partner,” who would be treated as a spouse for the purposes of the tax code. Individuals in a committed relationship—whether legally recognized as a domestic partnership, civil union or marriage, or not legally recognized—would qualify if they meet certain criteria. This would allow LGBT families, whether the parents are able to marry or not, to file joint tax returns and be eligible for tax-related exemptions, credits, and deductions designed for families, including joint filing status, child and dependency-related exemptions and credits, and estate and gift tax exemptions.
Broaden the definition of “qualifying person”:The IRS should broaden the “qualifying person” test for “Head of Household” status to include all “qualifying relatives.” The IRS should also broaden the “qualifying person” test for the credit for child and dependent care expenses to include all dependent “qualifying relatives” under the age of 13 so that any taxpayer who is providing the majority of support for a dependent and paying for child or dependent care can access these benefits designed to help families.
Broaden the definition of “qualifying child”:The IRS should allow adults who are parenting, raising, and providing for children to claim the children as a “qualifying child” even if they are not a legal parent. This would allow LGBT families and other families where children are raised by someone other than a legal parent to more easily access the “Head of Household” filing status, dependency exemptions, the child tax credit, the credit for child and dependent care expenses, and the earned income credit.
Expand access to the credit for child and dependent care expenses: To help families with the high costs of child care and dependent care for working families, the IRS should expand the credit for child and dependent care expenses so that any person who pays for the child care or dependent care of another person can claim the credit. This would help LGBT families who cannot currently claim this credit for their nonlegally related children or partners and also help families where a grandparent or other person assists the family by paying child or dependent care expenses.
Expand access to education deductions and credits: To encourage investment in higher education, the IRS should allow any individual who pays the tuition and fees of another person—regardless of the legal relationship to that person—to take these deductions and credits. This would help LGBT families with the cost of college tuition for their children and it would make it easier for an LGBT parent to return to college because his or her partner/spouse could use these deductions and credits to offset the cost of tuition.
End inequitable taxation of health benefits: Lawmakers should amend the tax code to end the inequitable federal taxation of benefits provided to same-sex partners and other “non-dependent” beneficiaries under employers’ health plans. Additionally, states that mimic the federal tax guidelines and impose and additional state tax on domestic partner benefits should eliminate their state’s portion of this tax.
The recommendations here would help LGBT families be treated like most other families on tax day. They would also help our country’s laws reflect the reality of today’s family structures. In other words, making these changes would help make our nation’s tax laws both fairer and more effective, which is a win-win for all.
Jennifer Chrisler is the Executive Director of the Family Equality Council, Laura Deaton is the Policy Research Director of the Movement Advancement Project, and Jeff Krehely is the Vice President of LGBT Research and Communications Project at American Progress.
* Because this report contains updated information, it supersedes tax-related content from the original October 2011 report.
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