Domestic Partnership vs. Marriage: What's the Financial Difference?

It's more than just taxes

A male couple with their toddler

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You might think that when it comes to your finances, marriage is the best choice. Getting married isn’t always the answer for every couple, though. In fact, roughly half of the U.S. adult population is unmarried.

A domestic partnership has its own financial benefits. The financial differences between a marriage and a domestic partnership are many, and each has its own advantages. Which is right for you depends on your preferences and circumstances.

What's the Difference Between Domestic Partnership and Marriage?

 Domestic Partnership  Marriage
Sharing retirement benefits can be complicated Spousal retirement benefits easier to access
May not have access to partner's health insurance Access to spouse health insurance
No special asset transfers Unlimited asset transfers in most states
Avoid the marriage tax penalty Larger standard tax deduction and gift tax exemption
May not have survivor benefits Clear spousal death benefits
No financial protection in separation Financial protection in divorce
Not recognized in all states Recognized in all states

There are some significant differences when it comes to the financial implications for domestic partnerships and marriages. Let's look at a few key areas.

Sharing Health and Retirement Benefits

Married partners have access to a spousal IRA, and can roll over a spouse’s IRA into theirs upon the partner's death. They also have more options for taking spousal Social Security benefits than domestic partners do. If you're married, you will also likely qualify for coverage under your spouse's health insurance plan, as this is a pretty standard benefit for married couples.

For domestic partners, sharing retirement benefits can be a bit more complicated, and you may end up with higher taxes. You also might experience a lack of coverage through your partner’s employer-sponsored health insurance, If you do, your partner's health insurance can also be treated as a taxable benefit.

Only 34% of companies that offer health benefits to spouses also offer them to opposite-sex domestic partners. That increases to 43% for same-sex domestic partners. That’s why this is an important factor to consider, since buying your own health insurance can be expensive.

Tax Benefits

Tax season may sweeten the marriage deal since there are several tax benefits couples enjoy from 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 larger home sale exclusion.

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 money to your family in the future, your gift-tax exemption is doubled, at $30,000 instead of $15,000.

Domestic partners, on the other hand, 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. This 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.

Survivor Benefits

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. All states recognize a married partner's right to inherit at least a portion of their deceased spouse's assets.

Depending on the state, domestic partners may not be eligible for death, pension, or survivor benefits if one partner passes away.

Asset Protection

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. Domestic partners who separate may share these same rights in some states, but exact laws vary significantly.

State Recognition

Perhaps the biggest drawback of a domestic partnership is that rights vary so greatly by state. Some states—such as California, Hawaii, Maine, Nevada, New Jersey, Oregon, Washington state, the District of Columbia, and Wisconsin—recognize domestic partnerships. Others, however, do not.

The rules also vary by city. Depending on where you live, lack of domestic partnership rights can often have a big effect on your finances, so this is an important point to consider.

Originally formed to provide legal benefits to same-sex couples, domestic partnerships now also apply to couples who live together or couples of age 62 and older who cohabitate in many states. Domestic partnerships can apply to both same-sex and heterosexual relationships.

Which Is Right for You?

Choosing between domestic partnership and marriage is a personal decision, and it will largely come down to your own values and the laws in the state where you live. Securing all the possible financial benefits of domestic partnership takes a bit more legwork and planning than it does in marriage, so be sure you're discussing everything with a lawyer who knows your state and local laws before you choose that route.

The Bottom Line

Regardless of whether you’re in a marriage or domestic partnership, being on the same page with your partner about money is an important aspect of managing your finances. You may even need to change your mindset about money when you get married or decide to become partners.

Life partnership is certainly about more than money, so these decisions should factor in the many different aspects of merging your lives together. Just be sure that money is a part of your planning as you decide whether to get married or become domestic partners.