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The New Jersey Civil Union Act: Tax Benefits?

On February 19, 2007, following the New Jersey Supreme Court’s decision in Lewis v. Harris, New Jersey effectuated the Civil Union Act (hereinafter, “the Act”). The Act grants couples in same sex civil unions equal protection and equal rights to couples in heterosexual marriages. In Lewis, the court unanimously held that although same-sex marriage is not a fundamental right, “committed same-sex couples must be afforded on equal terms the same rights and benefits enjoyed by married couples” and that the legislature amend or implement laws accordingly. New Jersey has decided to create a parallel civil union system rather than attempt to incorporate same-sex marriages within the existing marriage law framework. The Act provides that the legal benefits, protections and responsibilities afforded spouses in heterosexual marriages be granted to spouses involved in civil unions with respect to “laws relating to taxes imposed by the State or a municipality including but not limited to homestead rebate tax allowances, tax deductions based on marital status or exemptions from realty transfer tax based on marital status”.

This Act has vast tax implications affecting same sex couples’ property rights, estate transfer taxes, and income taxes.

Tax Advantages Under the New Jersey Civil Union Act

A. Property Rights

In New Jersey, civil union members can now own residential real estate as tenants by the entirety thereby avoiding probate and transferring full title to the surviving spouse by operation of the law in the event of the death of one of its members. Further, a civil union member can enjoy the tax-free realty transfer benefit afforded to those in a marriage.
Senior citizens and disabled persons in a civil union can now qualify for the Property Tax Reimbursement Program designed to reimburse these persons of property tax increases. Also if a civil union member is 65 years or older or permanently and totally disabled, they become eligible for a $250 local property tax deduction provided that the couple’s combined income is less than or equal to $10,000.
Under New Jersey law, veterans enjoy specialized tax exemptions based on their status as US war veterans. These exemptions are now applicable to the members in a civil union as well under the Act. In other words, a disabled war veteran in a civil union is entitled to a 100% tax exemption of real property taxes, as is his or her survivor in the couple in the event of death. Further, the member who is the survivor to the union of one who died during active duty in a war is entitled to a $250 local property tax deduction.

B. Estate Transfer

In New Jersey, property passing from a decedent to a beneficiary valued at $500 or
more is subject to a Transfer Inheritance Tax. However property passing to the decedents’ spouse and child (among others) is exempt from this tax due to their classification as Class A Beneficiaries. Under the Act, members in a civil union will be applicable for this exemption. Further, under state estate tax, the survivor in a civil union can now qualify for the exemption of death taxes incurred on property valued under $675,000. However they are still accountable, as are other married couples, of the federal estate tax on property transferred valued over $2 million.

C. Income Taxes

On a state level, members of the civil union will be able to file either civil
union joint or separate tax returns. Therefore they will qualify for any and all exemptions and deductions provided at the state income tax level. This means that even though members of the civil union do not have to file separately at the state level, they still must do so at the federal level. In general, federal income tax rates are higher than state taxes and filing jointly provides many exemptions for income tax purposes.

The Inequalities That Remain in Taxes between Civil Union Members and Married Individuals

It is important to note that although the Act constitutes a great leap forward for the homosexual community, the advancements marked by this Act come with a large disclaimer. Specifically, federal laws still do not recognize same-sex marriages. As a result, members of civil unions are not qualified as a couple under the federal rules of tax, immigration, social security, bankruptcy and others. For example, members of a civil union do not qualify for the unlimited marital deduction of federal gift taxes between spouses subjecting them to federal gift tax of all transfers over $12,000 within a year.
The addition of New Jersey as the third state recognizing civil unions is an achievement for the homosexual community because a vast number of family issues such as health care, child custody and employment benefits are handled at the state level. However, federal law still treats members of civil unions unequally.