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Marital status and mortgage interest, part 2: domestic partnership

Let's continue our recent exploration of the tax implications of marital status.

In our earlier post this week, we took note of tax considerations that arise during the divorce process. These include issues such as tax deductions for alimony payments and the taxability of transfers between spouses.

In today's post, let's finish the discussion we began last week of a recent case involving an unmarried California couple who sought tax deductions for mortgage interest on their jointly owned home. The case is Bruce Voss and Charles Sophy v. IRS.

As we noted, the Ninth U.S. Circuit of Appeals held that each of the partners could deduct interest on a mortgage up to $1.1 million, which is the limit under federal law. This deduction limit is twice as much as the limit for a married person who chooses to file a separate return.

In a sense, then, the Ninth Circuit's ruling seems to result in a peculiar form of marriage penalty. The maximum amount of a home mortgage upon which the members of a married couple are able to deduct interest is only half that of members of an unmarried same-sex couple who may be in a registered domestic partnership.

Marriage vs. domestic partnership in California

But what really is the difference between marriage and registered domestic partnership in California? For tax purposes, domestic partnership is an arrangement similar to marriage, with each party taxed on half of the other's income. California allows same-sex couples to enter into these partnerships. It also allows heterosexual couples with at least one partner who is 62 or older to do so.

Given this aspect of California's domestic partnership law, it is not only wealthy same-sex couples who are not married who stand to benefit from the Ninth Circuit's decision on the maximum tax deduction for home mortgage interest. Older, wealthy heterosexual couples who have entered into domestic partnerships are in a position to benefit as well.

In other words, as Peter J. Reilly pointed out in Forbes, the case of Bruce Voss and Charles Sophy v. IRS is welcome news not only for certain wealthy same-sex couples. It is also welcome news for certain wealthy seniors who have chosen domestic partnership rather than marriage.

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