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How Can Unmarried Cohabiting Couples Reduce Their Taxes?

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Cohabitation among unmarried couples is not a new phenomenon as many couples the world over practice it. More and more couples are shacking up before tying the knot.

Just like taking a car on a test drive before purchasing, many cohabiting couples believe it’s important to live together before getting hitched. It helps in testing the relationship before making a lifelong commitment.

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For some, cohabitation is the end game as they do not aspire to wed. Some just wish to have companionship, nothing more.

According to an analysis of U.S. Census Bureau data done in 2016, about 18 million adults in the United States are cohabitators living with an unmarried partner. That’s a large sum of the population.

It is not as easy for unmarried couples as it is for married ones to maneuver financial situations.

It is, however, not impossible as there exist tax breaks they can exploit to ensure they don’t run out of money.

Here are some of the ways cohabitating couples can reduce their taxes:

Avoid Gift Tax

Married and unmarried couples are viewed differently under the eyes of the law. For married couples, it is easy to exchange unlimited gifts and money to each other and they aren’t taxed for it. The same doesn’t apply to unmarried couples, unfortunately.

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For cohabitating couples, gifts beyond a certain point are taxed. In the year 2019, the annual gift tax exclusion is $15,000.

As long as you stay below this point, you won’t have to file for this tax.

If the relationship has one super-rich partner and a less-off one, a couple is bound to accrue this tax.

In cases where an unmarried couple has a joint bank account, if the richer one deposits a large sum and the less rich partner withdraws it, it is counted as a gift.

Name Each Other As Next Of Kin

Married couples enjoy exclusivity under the law and in case one partner dies, the property almost naturally goes to the remaining partner.

For cohabitating couples, however, the transfer is not as smooth unless there is a will involved.

To avoid the unnecessary drama and legal proceedings that could follow, ensure that you have both listed each other as beneficiaries. If not, the state is sometimes expected to make the decision for you and it’s not guaranteed you will win.

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Selling Your Home

Living together can be a tricky situation when you are not married. Selling the house can be even more complicated.

Unmarried couples can, however, split the profit on the sale of their house.

Smartly Allocate Dependents

It makes more financial sense to list your children as dependents to the partner who is earning more money. He or she should claim the head of the household status as they are bound to get a bigger tax break.

It is important to remember that a child can only be considered yours if your name appears on the birth certificate or you diligently pay child support.

Therefore, if only one partner is the biological parent, the other should pay child support to be able to name them as a dependant.

If you do not have children, you should both file as single taxpayers. In case one partner is a stay-at-home parent and earns little income, it means they owe less tax. It would also be beneficial to assign dependents to them instead.

Adoption

Adopting a child is not an easy or cheap process. Many times, a couple comes together and splits the financial responsibility including attorney and adoption fees, traveling costs among many more.

If you shared the cost, an unmarried couple can split the credit given to adoptive parents which is up to $13,810 per child.

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