Financial Benefits—Domestic Partnerships vs. Marriage
Getting married isn’t always the answer for every couple. Roughly half of the U.S. adult population is unmarried. You might think that when it comes to your finances, marriage is a better choice.
A domestic partnership has its benefits, as well. The financial differences between a marriage and a domestic partnership are many, and each has its own benefits. Which is right for you depends on your preferences and circumstances.
Perks of Marriage
There are many financial benefits of marriage. For one, your retirement could benefit. Married partners have access to a spousal IRA, and can roll over a spouse’s IRA into theirs upon the partner's death.
Married couples can also transfer an unlimited amount of assets to one another, sans gift or estate taxes (though some states are exempt). And, if you plan to gift your family money in the future, your gift-tax exemption is doubled, at $30,000 instead of $15,000.
If you’re married and your spouse passes away without a will, you are much better off than if you were in a domestic partnership. Domestic partners may not be eligible for death, pension, or survivor benefits if your partner passes away.
Taxes and Divorce
Tax season may also sweeten the marriage deal since there are several tax benefits of tying the knot. Your standard deduction is now double what it was as an individual. As a married couple, you are also eligible for a large home sale exclusion.
But keep in mind that once you’re married and filing taxes jointly, you may end up moving up a tax bracket, which translates into a larger tax bill.
If you’re legally married, you will also be better protected financially in the event of a divorce, as you will be entitled to the division of marital assets, as well as potential spousal support. You will also likely qualify for coverage under your spouse's health insurance plan, as this is a pretty standard benefit for married couples.
Perks of a Domestic Partnership
Originally formed to provide legal benefits to same-sex couples, domestic partnerships also apply to couples who live together or couples of age 62 and older who cohabitate, depending on your state. Domestic partnerships can apply to both same-sex and heterosexual relationships.
While some employers (about 25% in the U.S.) offer health benefits to domestic partners, it is by no means a standard. That’s why this is an important factor to consider, since buying your own health insurance can be expensive.
Partners avoid the marriage tax penalty, which means that couples who earn roughly the same generally get penalized during tax time, as they tend to move up a tax bracket more quickly. It is not to be confused with the marriage bonus, in which one spouse earns significantly less than the other, thus delaying the tax bracket jump.
It can be tough in a domestic partnership, with the unavailability of some of the benefits married couples receive. You might experience a lack of coverage through your partner’s employer-sponsored health insurance, and no survivor's benefits (unless you live in a very liberal city such as New York City)
There are also other financial concerns for unmarried couples, such as lack of legal protection when it comes to joint assets or property and potential income tax issues.
Perhaps the biggest drawback of a domestic partnership, however, is that rights within one vary so greatly by state. Some states––such as California, New Jersey, Colorado, Maine, Maryland, Nevada, Oregon, Washington, Hawaii, the District of Columbia, and Wisconsin––recognize domestic partnerships. Others, however, do not.
Worth noting––the rules also vary by city. The lack of domestic partnership rights can often have a big effect on your finances, so this is an important point to consider.
Regardless of whether you’re in a marriage or domestic partnership, being on the same page with your partner in terms of money is an important aspect of managing your finances. Word to the wise––you also may need to change your mindset about money when you get married.
You can also consider the following tips––trying to create a family budget is a great first step. It’s also wise to discuss whether you’ll combine bank accounts or keep them separate. Forming an emergency fund, planning for retirement, and forming an estate plan are other steps to take when you’re in a formal relationship (but be sure to keep potential inheritance taxes in mind with the latter).