Domestic Partnership vs Marriage Taxes: Which Filing Status Is Better?

Choosing between domestic partnership and marriage carries significant tax consequences. While both relationships offer legal recognition, their treatment under federal and state tax laws differs, impacting income tax filings, deductions, retirement benefits, and estate planning. Understanding these differences is crucial for making informed financial decisions.

Tax treatment depends on whether a couple is legally married or in a registered domestic partnership. This distinction influences filing options and long-term financial planning.

Federal Filing Options

The IRS recognizes only marriage for federal tax purposes, meaning domestic partners cannot file jointly or access the same benefits as married couples. Married couples can file jointly or separately, with joint filing often providing advantages such as lower tax brackets and eligibility for credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit. Domestic partners must file as single or head of household if they qualify, which can result in higher tax burdens.

Filing jointly allows married couples to combine their incomes, potentially lowering their overall tax rate due to the progressive tax system. In 2024, the 22% tax bracket applies to single filers earning between $47,150 and $100,525, while for married couples filing jointly, it applies to combined incomes between $94,300 and $201,050. A married couple with one high earner and one lower earner may pay less in taxes than two domestic partners with the same combined income who must file separately.

Joint filers also benefit from a higher standard deduction. In 2024, the standard deduction for single filers is $14,600, while married couples filing jointly can claim $29,200. Domestic partners filing separately each receive the single filer deduction, which may result in a higher taxable income compared to a married couple with the same earnings.

State-Level Recognition

State tax treatment of domestic partnerships varies. Some states extend nearly identical tax benefits to both marriages and domestic partnerships, while others recognize only marriage for state income tax filings.

In states that recognize domestic partnerships, registered partners may be allowed to file joint state tax returns, even though they must file separately at the federal level. This can create complications when reconciling state and federal tax liabilities. For example, California allows domestic partners to file jointly for state taxes, but because the IRS does not recognize their relationship, they must prepare a mock federal return as if they were married to determine their state tax obligations.

Other states, such as Texas and Florida, do not recognize domestic partnerships for tax purposes, meaning registered partners must file as single individuals for both federal and state taxes. This lack of recognition can limit access to state-level tax benefits, such as dependent exemptions or state-specific deductions available to married couples. In community property states like Nevada and Washington, domestic partners may be required to split income and report half of their earnings on individual state tax returns, which can lead to unexpected tax liabilities if one partner earns significantly more than the other.

Deductions and Credit Allocation

Deductions and tax credits are allocated differently for married couples and domestic partners. Since domestic partners must file separately for federal taxes, they cannot combine deductions in the same way married couples can. This affects itemized deductions such as mortgage interest, medical expenses, and charitable contributions, which are often more beneficial when combined under a joint return.

The IRS allows taxpayers to deduct medical expenses that exceed 7.5% of their adjusted gross income (AGI). A married couple filing jointly can pool their medical expenses, increasing the likelihood of surpassing this threshold. Domestic partners must each meet the threshold individually based on their separate AGI, making it harder to claim the deduction. Similarly, mortgage interest deductions are tied to ownership and debt responsibility. If only one partner is listed on the mortgage, only that partner can claim the deduction, even if both contribute to payments. Married couples can deduct interest on up to $750,000 of mortgage debt collectively, which can lead to greater tax savings.

Tax credits, which directly reduce tax liability, also differ. The Child and Dependent Care Credit is based on eligible childcare expenses incurred so a taxpayer can work or look for work. Married couples filing jointly can claim up to 35% of $3,000 in expenses for one child or $6,000 for two or more children. Domestic partners cannot claim the credit jointly, meaning only one partner can take the deduction—even if both contribute to childcare costs. This limitation can result in lower overall tax relief compared to a married couple with the same income and expenses.

Estate and Gift Tax Ramifications

Estate and gift tax laws favor married couples. The unlimited marital deduction allows spouses to transfer unlimited assets to each other during life or at death without incurring federal estate or gift taxes. Domestic partners, however, are treated as unrelated individuals for these purposes, meaning any transfer exceeding the annual gift tax exclusion—$18,000 per recipient in 2024—may be subject to a 40% federal gift tax once the lifetime exemption is exhausted.

Because domestic partners do not receive automatic spousal rights, estate planning requires additional legal structures to avoid unintended tax consequences. If one partner leaves a substantial inheritance to the other, it may be subject to federal estate tax if the total estate value exceeds the exemption threshold, set at $13.61 million in 2024. Married couples can transfer an unlimited amount to a surviving spouse without triggering estate tax and can also utilize portability, allowing the surviving spouse to inherit any unused portion of the deceased spouse’s exemption. Domestic partners do not have this option, making proactive estate planning, such as irrevocable trusts or life insurance policies, necessary to mitigate tax exposure.

Retirement Accounts and Distributions

Retirement account tax treatment differs significantly between married couples and domestic partners, particularly regarding contributions, beneficiary designations, and required minimum distributions (RMDs). Since federal law does not recognize domestic partnerships, partners do not receive the same benefits as spouses when inheriting retirement assets or making spousal contributions to tax-advantaged accounts.

Spousal IRA contributions allow a working spouse to contribute to an IRA on behalf of a non-working or lower-earning spouse, up to the annual limit of $7,000 in 2024 ($8,000 for those 50 and older). Domestic partners are not eligible for this provision, meaning each individual must qualify for contributions based on their own earned income. This restriction can limit retirement savings potential, particularly if one partner stays home or earns significantly less.

Employer-sponsored retirement plans such as 401(k)s automatically recognize spouses as primary beneficiaries unless a waiver is signed. Domestic partners must be explicitly named as beneficiaries, and failure to do so can result in assets being distributed according to default plan rules or state intestacy laws.

When inheriting retirement accounts, surviving spouses receive preferential tax treatment. A spouse inheriting an IRA can roll the funds into their own IRA and delay RMDs until reaching age 73. Domestic partners must treat an inherited IRA as a beneficiary account, requiring them to withdraw all funds within 10 years under the SECURE Act of 2019. This accelerated distribution schedule can lead to higher tax liabilities, as withdrawals are taxed as ordinary income. Proper estate planning, such as using trusts or Roth conversions, can help mitigate these tax consequences for domestic partners.

Healthcare and Insurance Cost Deductions

Healthcare expenses and insurance coverage are treated differently for domestic partners and married couples. While some states and employers extend health benefits to domestic partners, the tax implications of these benefits differ under federal law, affecting both payroll taxes and deductions for medical expenses.

Employer-sponsored health insurance for a spouse is excluded from taxable income, meaning the value of the coverage is not subject to federal income or payroll taxes. Domestic partners do not receive this tax-free treatment unless they qualify as a dependent under IRS rules, which require the partner to have little to no income and receive more than half of their financial support from the taxpayer. If a domestic partner does not meet these criteria, the value of employer-provided health benefits is considered taxable income, increasing overall tax liability.

Medical expense deductions are also affected by relationship status. Married couples filing jointly can combine their medical costs to exceed the 7.5% AGI threshold required for deductions. Domestic partners must meet this threshold individually, making it harder to deduct out-of-pocket healthcare expenses. Additionally, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) allow married couples to use pre-tax dollars for a spouse’s medical expenses, whereas domestic partners cannot use these funds for each other’s care unless they qualify as dependents. These limitations can make healthcare costs more burdensome for domestic partners, requiring alternative tax planning strategies to maximize deductions.