FAQS: CIVIL UNION TAX RULES IN DELAWARE
Tax FAQs pertaining to Delaware's 2011 Civil Union Act
The 146th Delaware General Assembly passed Senate Bill 30, signed by Governor Markell on May 11, 2011, which creates the recognized legal relationship of civil union between two persons of the same sex in Delaware.
This Act further recognizes as civil unions for all purposes under Delaware law the legal union between two persons of the same sex entered into in jurisdictions outside of Delaware, provided that such union and the parties thereto meet the Delaware eligibility requirements to enter into a civil union in the State of Delaware. Parties who enter into a lawful civil union in Delaware, or whose legal union is recognized as a civil union under Delaware law, will have all of the same rights, benefits, protections and responsibilities as married persons under Delaware law.
Filing your Delaware income tax return
Beginning in 2012, Delaware parties to a civil union, valid under Chapter 2 of Title 11 of the Delaware Code are subject to the same tax statutes and regulations that apply to married filers. Delaware doesn't recognize Civil Unions before 2012.
Just like a married couple, you may file Jointly; Married/ Civil Union & Filing Combined Separate on Form 200-01 or Separately. As a party to a Civil Union, you can't file using the single filing status or head of household status on a Delaware tax return.
Generally, you must use one of the following filing statuses on your Delaware Personal Income Tax form:
- Married/Civil Union & Filing Separate Forms; or
- Married/Civil Union & Filing Combined Separate.
The federal government doesn't recognize Civil Union individuals as married individuals for federal tax purposes.
Because of the differences in filing status between your federal return and your Delaware return, you should have two federal tax returns completed:
1. A federal income tax return that you will fill out and submit to the IRS using a single or head of household filing status. We'll call this your actual federal return.
2. Complete the second federal return as if you are filing Jointly; Married/Civil Union & Filing Combined Separate on Form 200-01 or Separately. Use the information you calculate on the Pro-Forma or "as if" federal return to complete your Delaware income tax return.
Don't submit the Pro-Forma return to the IRS, but do include it with your Delaware tax return to help facilitate processing of your Delaware tax return.
If you and your partner are filing Separately or Filing Combined Separate on Form 200-01, you each must submit a Pro-Forma federal married filing Separate return to Delaware.
General filing instructions
If you entered into a Civil Union under Delaware law or if you were in a Civil Union during 2012 and the other individual died and you didn't enter into a new Civil Union or marry during 2012, please follow these directions for filing your Delaware income tax return:
- Complete your federal forms (1040, 1040A, 1040EZ) for each individual using the appropriate federal filing status, such as single or head of household. File these returns with the IRS.
- Fill out another federal form as if you are filing a joint or separate federal return. Use all the same IRS rules and procedures that apply to married couples. Don't file this Pro-Forma or "as if" form with the IRS, but do include it with your Delaware tax return.
- Complete your Delaware return jointly; civil union & filing combined separate on Form 200-01 or separately. The filing status you use on your Delaware return must match the status you use on the Pro-Forma federal return. You must take the information from the Pro-Forma federal return and not your actual federal return that you file with the IRS.
- Your "as if" federal return will be filled out as if you were married, so you are eligible to combine all personal, blind, senior, and dependent exemptions on the Delaware return if filing jointly.
If you are a Non-Resident subject to Tax in Delaware.
Information about Non-Residents. A Non-resident of Delaware who works in Delaware and who has entered into a Civil Union or Same Sex Marriage in another state that is recognized as a civil union in Delaware under 13 Del. C. §213, would be taxed as if the taxpayer were a nonresident married spouse who worked in Delaware.
Conversely, a Resident of Delaware who has entered into a Civil Union in Delaware and becomes a Non-Resident but works in Delaware, would be taxed as if the taxpayer were a nonresident married spouse who worked in Delaware, irrespective of whether the State where they are now domiciled recognizes Civil Unions or Same Sex Marriages.
If you file your taxes using software
Information about filing electronically (e-file). We encourage you to e-file when possible. Some software supports Civil Union filings. You should check the software before buying it to ensure that it allows you to file as under Civil Union.
If a tax professional files your returns, ask if their software supports Civil Union filings. Take these steps to ensure that your income tax returns are filed correctly:
- Don't file your federal and Delaware electronic returns together. Each CIVIL UNION COUPLE must file individual federal forms with the IRS in accordance with federal law. This usually means that each Civil Union couple must file a separate federal return.
- After you file your federal returns, complete your "as if" federal return. Use the information from your "as if" return to complete your Delaware return. When e-filing your Delaware return, you must file it as a "state only" submission.
When you complete and review your returns on your computer, follow the instructions under "Filing Paper Returns" (below).
If you mail your returns to us
Filing paper returns. To ensure that your income tax returns are filed correctly:
- File your actual federal forms with the IRS.
- After completing your "as if" federal return, use the information from your "as if" return to complete your Delaware return(s).
- Submit the following to the Delaware Division of Revenue:
- Your actual federal return(s).
- Your "as if" federal return. Write "CIVIL UNION FOR DELAWARE ONLY" at the top of the return; and
- Your Delaware return.
The mailing addresses are available in the 2012 Delaware income tax returns.
What changes can you expect?
Federal law limits certain deductions, exclusions, and credits based on filing status and/or federal adjusted gross income (AGI). Many of the limits are the same for single filers as for joint filers. For married persons choosing to file separately, the limits are usually half the amount allowed for single or married joint filers.
As a Civil Union couple, you can no longer use the single filing status on your Delaware return. The change in your filing status and federal AGI may require adjustments to your Delaware return.
These webpages explain changes to common credits, deductions, or issues that you will want to know as you prepare and file your taxes, including:
- Capital gains and losses.
- Earned Income credit (EIC).
- Individual Retirement Accounts (IRA).
- Medical and dental expenses.
- Medical insurance premiums paid for a partner by an employer (imputed income).
- Passive real estate loss.
- Pension plans.
- Principal residence gain exclusion.
The examples show only some of the situations in which the change in your filing status and federal adjusted income could impact your Delaware tax return. When completing your "as if" federal return, make sure to carefully follow all rules and regulations that apply to married filing jointly or married filing separately persons in the IRS instructions to correctly determine your Delaware tax liability.
It's very important to keep copies of all "as if" returns with your tax records.
Capital gains and losses
Did you have a capital gain or loss, including any capital gain distributions or a capital loss carryover from 2011? If so, you must complete an "as if" federal Schedule D.
Capital losses offset any capital gains. For joint and single filers, if the losses exceed the gains, you may deduct up to $3,000 ($1,500 for Married filing separately) of the excess loss as a deduction on your federal return. This may result in Civil Union couples needing to deduct a different amount on their individually filed federal returns than on their "as if" joint federal return. Consider the following examples:
Example 1: Casey and Pat are a Delaware Civil Union couple. For federal purposes, both Casey and Pat use a single filing status. In 2012, Casey and Pat each sold securities (stocks) resulting in long-term capital losses of $4,200 and $2,500, respectively. On their individual federal returns, Casey's capital loss is limited to $3,000 leaving $1,200 in long-term capital loss carryover for 2013 while Pat can deduct the entire $2,500.When Casey and Pat recalculate their capital loss on their "as if" federal joint return, they are limited to a $3,000 capital loss deduction for 2012. Casey and Pat's total capital losses are $6,700 ($4,200 + $2,500) and their long-term capital loss carryover (for Delaware purposes) for 2013 is $3,700.
If Casey and Pat choose to file separately, each is limited to a $1,500 capital loss deduction on their "as if" federal return.
Casey and Pat use the following schedule to keep track of their capital gains and losses for their federal and "as if" federal returns.
|Loss Taken as a Deducation|
|Casey's individual federal return||$4,200||$3,000||$1,200|
|Pat's individual federal return||$2,500||$2,500||$0|
|Casey's "as if" Civil Union filing separate federal return used to compute Delaware tax||$4,200||$1,500||$2,700|
|Pat's "as if" Civil Union filing separate federal return used to computer Delaware tax||$2,500||$1,500||$1,000|
|Casey & Pat's "as if" Civil Union filing jointly federal return used to computer Delaware tax||$6,700||$3,000||$3,700|
Earned Income Tax credit (EIC)
You may have qualified for the earned income credit on your actual federal return, but you may not qualify for it on your Delaware return. The Delaware earned income credit is based on your federal earned income credit from your "as if" federal return.
Example 2: Sam and Rick are a Delaware Civil Union couple. Sam has one child and is above the EIC income threshold for single filers and couldn't claim the EIC on his original federal return. Rick also has one child and claimed an EIC of $2,112 on his original federal return. On their joint "as if" federal return, Sam and Rick's combined income claiming two children qualifies them for a federal EIC of $3,500. Sam and Rick's EIC on their 2012 joint Delaware return will be 20 percent of the amount on their joint "as if" federal return.
Individual Retirement Account (IRA) contributions
Because the amount a taxpayer can deduct for contributions to a traditional IRA is different for married taxpayers, a Civil Union couple filing jointly may need to deduct a different amount on their joint "as if" federal return than on their actual individual federal returns. A Civil Union couple filing separately may have a lower deduction on their separate "as if" return.
Example 3: George and Rob are a Delaware Civil Union couple. George contributes $3,000 to a traditional IRA. George can't deduct any of the contributions because he has exceeded the income limitation for single filers.Rob contributed $2,000 to a traditional IRA. Rob's income is low enough that he can deduct all $2,000 in contributions as a single filer.
On George and Rob's "as if" joint federal return they are allowed to deduct all $5,000 in contributions because their joint income does not exceed the income limitation for joint filers.
Example 4: Randi and Leslie are a Delaware Civil Union couple. Randi makes contributions of $3,000 to a traditional IRA. Randi's income is low enough for a single filer that she can deduct all $3,000 in contributions.Leslie also contributed $3,000 to a traditional IRA. Leslie can also deduct all $3,000 in contributions as a single filer.
Randi and Leslie decide to file separately for Delaware. After applying the federal limits for married filing separately on their "as if" tax return, neither can deduct any of their IRA contributions because their income is over the income limitation.
Please refer to the 2012 IRS Publication 590 for all instructions, limitation amounts, and worksheets for calculating IRA deductions.
Medical and Dental Expenses
You may deduct qualified medical and dental expenses you paid for yourself, your spouse or other Civil Union individual, and your dependents. As a result, you may have a different amount on your federal "as if" Schedule A than your actual federal Schedule A.
Example 5: Jennifer and Mallory are a Civil Union couple. For federal purposes, they each used a single filing status and itemized deductions. Jennifer pays for both her and Mallory's medical expenses. On Jennifer's individual return, she deducted only her medical and dental expenses. She can't deduct Mallory's medical expenses on her original federal return because Mallory isn't a dependent on her return and is not recognized the same as a spouse under federal law. Mallory claimed the standard deduction on her original federal return.Jennifer and Mallory file separately for Delaware. On Jennifer's "as if" federal Schedule A, Jennifer can include the medical and dental expenses paid for Mallory. Because Jennifer and Mallory have chosen to file as a Civil Union couple filing separately, Mallory must also itemize deductions on her "as if" federal and Delaware returns. Medical insurance premiums paid for your partner by an employer
Delaware doesn't tax you on any medical insurance premiums paid by your employer for the other Civil Union member that are included in your income. Federal law, however, requires that you include these amounts in your income unless that member is a dependent.
To exclude these amounts on your "as if" federal return:
- Check the amount your employer included in Box 1 of your Form W-2 for health insurance premiums paid for the other Civil Union individual beginning with the month that you became entered into a Civil Union in Delaware. If you were in a Civil Union for the entire year, you may exclude all amounts included in your income. Note: You can only exclude amounts included in income from the date you entered into a Civil Union.
- Enter the sum as a negative amount on the "other income" line of your "as if" federal return. Identify the subtraction as imputed income.
Example 6: Alex received $4,800 in imputed income in 2012 for health benefits for Brian that was paid by Alex's employer. The employer included the $4,800 in Alex's W-2 and he has included that amount as wages on his federal return. Alex and Brian qualified as a Delaware Civil Union couple in June, 2011. Alex does not have to pay tax on the imputed income after he entered into a Civil Union. Alex's monthly imputed income was $400 ($4,800 divided by 12 months). The amount on the "other income" line of Alex and Brian's joint "as if" federal return is a negative $2,800 ($400 times seven months).
Taxable benefits for former Civil Union members: If you dissolved your Civil Union during the year, you may be allowed a subtraction for the imputed value of certain fringe benefits provided by your employer for your Civil Union member during the part of the year you were still in the Civil Union. You must have included the imputed income in your federal income to claim the Delaware subtraction. Passive activity loss limitations on rental real estate activity
The rules and limits for deducting a loss when you actively participate in a passive rental real estate activity are different for married taxpayers.
Example 7: Cindy and Dorothy are a Delaware Civil Union couple. In 2012, Cindy had partnership income of $8,000, and a $30,000 loss from rental real estate activities. Cindy can use the rental activity loss to offset the $8,000 in passive income from the partnership. The remaining $22,000 in loss can then be used to offset nonpassive income such as wages.Dorothy had a $13,000 loss from rental real estate activities. Dorothy's income is low enough that she can use the $13,000 to offset nonpassive income.
On their "as if" federal joint return, Cindy and Dorothy have a total passive activity loss of $43,000 from rental activities in which they actively participated. Of that amount, $8,000 can be used to offset Cindy's passive partnership income. However, Cindy and Dorothy's joint income is more than the income limitation so they aren't allowed to offset any nonpassive income. They also aren't allowed to offset nonpassive income if they filed separately.
**Important: Keep track of the unused passive activity loss difference to correctly offset passive income in future tax years for Delaware. Pension plans
Some qualified pension plans may prohibit certain asset transactions unless they are part of a survivor benefit plan or from a court ordered division (generally divorce or property division).
Because federal law does not recognize a Delaware Civil Union in the same manner as a spouse, you may have taxable income or penalties.
You should check with your tax professional regarding both the federal and state tax consequences of a court ordered division. Principle residence gain exclusion (IRC § 121)
Note that the limits for the amount of gain that can be excluded from gross income on the sale or exchange of a principle residence are different for taxpayers who are married filing jointly.
Example 8: Dominic and Trent are a Civil Union couple. Dominic and Trent each own a 50 percent interest in a house. They sell their house for a gain of $260,000. They each meet the requirements for ownership and use to exclude the gain on the sale of the residence from gross income. Both Dominic and Trent, each using a single filing status, can exclude $130,000 of gain on their respective federal returns.Dominic and Trent can exclude the entire $260,000 on their "as if" federal joint return as well.
Example 9: Sally and Mona are a Civil Union couple. Sally and Mona share a home that is owned by Sally. Sally sells the house for a gain of $300,000. Sally meets the ownership and use requirements and, therefore, can exclude $250,000 of gain using the single filing status. She must recognize $50,000 of gain in gross income on her federal return. Mona has lived with Sally for three years, but is not an owner.On their joint "as if" federal return, Sally and Mona can exclude the entire $300,000 allowed to married filing joint taxpayers when both meet the use requirements and one meets the ownership requirements.