California

IRS Will Recognize Gay Couples In California For Tax Purposes

Ird This is a major first. The IRS will tax start to recognize gay couples as a pair for tax purposes in California. The San Francisco Chronicle reports:

"In a significant move for same-sex couples, the Internal Revenue Service has decided to recognize California's community property law and treat the income earned by California registered domestic partners as community property income for federal income tax purposes."

"The decision, which was issued in a private-letter ruling on Friday, reverses a position the IRS took in 2006, when it said California's registered domestic partners should each report on their own federal tax return only the income they personally earned, not one-half of their community income."

"The new decision does not require or even allow California's registered domestic partners to file their federal tax return as married filing jointly or married filing separately, as they must do with their state tax returns. They must each still file a single federal return, but each should now report one-half of their community income."

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Comments

  1. One step at a time...

    Posted by: Steve | Jun 5, 2010 5:45:36 PM


  2. Completely ridiculous. More parallel rules that apply to us as a separate class. Married people get to avoid all the complexity of community property laws by filing jointly. Same sex couples don't have that option. And god help the couple that is splitting deductions on two single returns and trying to verify that for an audit.

    Posted by: PDX Guy | Jun 5, 2010 5:46:40 PM


  3. It's true that complete equality in tax treatment would be the best. That said, the "income splitting" approach now approved by the IRS results in lower taxes than just filing individually, and also significantly lower taxes than paid by a federally recognized married couple filing a "married filing jointly" return. Maybe straight folks will now complain about registered domestic partners and married same sex couples paying lower taxes than straight married couples - could be fun.

    Posted by: Eric | Jun 5, 2010 5:58:53 PM


  4. @Steve...RIGHT ON!

    Looks like one more positive that can be added to the argument in front of the Supreme Court when the lawsuit lands there. Or maybe negative, depending on how it's spun from both sides...

    However, aren't there other states where domestic partnerships are legal and what about the states where gay marriage is legal? Does this also apply to them? If not, why not? Seems to me the IRS can't pick and choose which states to show preference to in the tax code. Just wondering.

    Posted by: Keith | Jun 5, 2010 6:26:45 PM


  5. It will not always result in lower taxes. One example would be if one partner is filing head of household with dependents, assuming this is the lower earning partner, they may no longer qualify for the Earned Income Credit because now the half of combined income is too high. Also, there will be no way to electronically file since the withholding amount will not match that on the electronically submitted income documents, and there will be no cross reference to be checked. This also means that these couples can expect an audit every year, again because income documents will not match in the database with what is on the return.

    Posted by: PDX Guy | Jun 5, 2010 7:04:16 PM


  6. Why just California? What about other states that have DP?

    Posted by: DD | Jun 5, 2010 7:04:44 PM


  7. Slowly... but surely. Great news!

    @DD - Exactly since IRS is a federal entity. Perhaps it's because California's economy is in the dump.

    Posted by: gayalltheway | Jun 5, 2010 7:19:58 PM


  8. Meanwhile, other countries already have gay people being equal to straight people on the law. America blows.

    Posted by: JJ | Jun 5, 2010 7:22:08 PM


  9. The California law is a pain in the ass. My step-dad is my tax accountant and he has compared what we would get if we filed our California tax joint to what we would get back seprate. We're getting fucked over. We DON'T have the option to file seprate.

    This is bullshit.

    Posted by: ronnykmarshall | Jun 5, 2010 7:29:06 PM


  10. The community property states are:

    Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin.

    Don't see this being an issue anywhere else except maybe Washington.

    I still don't see how this is a good thing at all. It shows that the feds will recognize state law for community property with gay couples, but not marriage. Again, just picking and choosing what rules are followed and which are ignored or directly superseded.

    Posted by: PDX Guy | Jun 5, 2010 7:40:13 PM


  11. Is this just because California's economy is in the toilet and they need to get revenue from wherever they can snatch it from? I really don't see how this is a benefit to same-sex couples. But then again, I'm not an accountant. It seems to me they are requiring you to report your significant other's earnings but the state is not recognizing you as a legal entity. And to that end, would it be legal to require this of domestic partners seeing that we aren't recognized as a legal entity (i.e., married) by the state of California?

    Posted by: Stephen | Jun 5, 2010 7:55:18 PM


  12. This is TREMENDOUS!! It sets a legal precedent that can be used nationwide. If the federal government recognises same-sex marriages in one state, it will be nearly impossible for them to deny that right to couples in EVERY state. And if same-sex couples have official recognition for tax purposes, the fed will eventually have to concede that recognition for immigration, inheritance, and every other legal matter. Spouses of military personnel will have to be given benefits as well. Which means DADT is a dead duck. DOMA is done.

    Pandora's box is open. The slaves are free. There may be a few court cases ahead, but with this decision, the federal government has sealed it's fate. Gay Citizens of the U. S. will no longer be denied our rights under federal law.

    Posted by: Jay Croce | Jun 5, 2010 8:12:39 PM


  13. This does not recognize same-sex marriage in California, it recognizes domestic partner arrangements, which are both same-sex and oppo-sex. It's just another way to obligate same-sex couples without recognizing same-sex marriage. It creates a separate class of citizens, plain and simple.

    Posted by: Tracy | Jun 5, 2010 8:28:15 PM


  14. My understanding is that California's DP law states that the community property rules cover DP's the same as marriages. Therefore if you read the current info on Federal filing for community property states, pub. 555, it says that in most cases a jointly filed return will have the best tax benefit, something that is still denied. Any accountant will tell you the community property rules on separate returns are a HUGE pain and often result in audits because the numbers don't add up without a thorough explanation (which is what an audit is).

    This has nothing to do with California's economy, since this is Federal regulations coming down.

    Posted by: PDX Guy | Jun 5, 2010 8:43:36 PM


  15. @Stephen

    A Registered Domestic Partnerhip IS a legal entity recognized by the State of California, as are the same-sex marriages performed prior to the passage of Prop 8. The community property provisions of the domestic partnership law (which affect much more than taxes) have been in place since 2005. It is a no-shit serious consequence/advantage of filing as Registered Domestic Partners, which is one of the reasons why couples do not enter into RDP's lightly.

    Posted by: Gianpiero | Jun 5, 2010 8:57:02 PM


  16. @ Gianpiero (and whomever else has a knowledgeable answer):

    Okay, brass tacks here. Clearly I'm not an accountant. So what I want to know is does this benefit same sex couples? Wouldn't it depend on the financial circumstances of that couple?

    Also, from a legal standpoint does A + B really equal C? Meaning, just because the IRS is requiring domestic partners to report half their partner's income, how does that put the cards in our favor as far as repealing Prop 8? Does one really equal the other?

    Pretend I'm an idiot when you reply. (Not too far a stretch, I know.)

    Posted by: Stephen | Jun 5, 2010 11:44:19 PM


  17. We are one of the 18,000 legally married, same-sex couples in CA. Last year, our CPA prepared individual federal tax returns for each of us. However, in order to comply with CA state law, he also prepared a "dummy" joint federal return as if we were a heterosexual married couple. The result? Had our marriage been recognized, we would have paid $5,000 less in federal taxes than we did AND our CPA would have charged us for preparing one federal return instead of three!

    Posted by: Gary | Jun 6, 2010 12:03:07 AM


  18. Thanks, Gary. I was waiting for someone to explain that with a progressive income tax, reporting half the community income SAVES YOU MONEY! Always. You gave a very concrete example.

    Posted by: Spyro | Jun 6, 2010 1:14:03 AM


  19. Ummm, Spyro, you got it backwards. It does not always save you money, and in Gary's example, if he had been allowed to file jointly, his tax liability would have been $5000 LESS than in filing individual returns. Which he still has to do.

    Posted by: PDX Guy | Jun 6, 2010 2:11:44 AM


  20. Is this ruling retroactive and, if so, to what year? I can see that some of us (like Gary above) would see a big benefit from filing amended returns with this new provision.

    Posted by: Chris | Jun 6, 2010 10:19:41 AM


  21. As a gay married couple and registered domestic partners, my husband and I are required to file a joint California return and 2 seperate individual federal returns. This means we pay more to our tax preparer than an opposite-sex married couple, since he needs to create 3 returns instead of just 2. This latest development is like throwing a dog a bone. We demand equality with the federal tax treatment rules afforded to opposite-sex married couples.

    Posted by: John | Jun 6, 2010 11:58:16 AM


  22. John,

    I can assure you that you are making up the difference and alot more with this new rule. The best situation you can have is splitting income and filing separate. The worst is married filing separate.

    I would be interested to see where this rule is originating. Is it a treasury reg or a recent IRS notice? If I was in a situation where this would benefit me, even though I live in Florida, I would file like this and challenge the IRS to take it to court. They will lose; I don't know of any rules as basic as your filing status that apply to only one state. This is a very good thing and actually better than what the straight folks have available to them.

    Posted by: Jason | Jun 6, 2010 12:12:33 PM


  23. The big point here is that a married couple in California cannot file to become domestic partners. This is where the separate status comes into play when discussing Prop 8. In fact, it is officially illegal to file for domestic partnership at the same time as being married in the state.

    My husband and I are one of the 18,000 married couples, but you all need to get a better CPA if you are getting charged for filing 3 returns. Ours is at a small, family-run accounting business in a small conservative town, but they have the decency to only charge us the same rate they would any other married couple.

    Posted by: Alan E. | Jun 6, 2010 1:09:39 PM


  24. The IRS ruling is wrong.
    I couldn’t disagree more with the premise of your article. The IRS ruling hurts domestic partners not helps them.
    It forces Domestic Partners to file their tax returns in a way that may not be beneficial to them.
    Currently the IRS refuses to allow Domestic Partners to file as married. In all other relationship/business ownership cases the IRS uses State property and ownership laws for Federal income tax purposes. In California’s case that means the only legal entity the IRS recognizes for Domestic Partners is as partners in a partnership. Under California law partnerships do not have to be written, and income and expenses can be allocated by partners by agreement. Under this premise the IRS ruling is non-sense and should/will be overturned.
    Some of the more than 100 harms that ALWAYS requiring splitting all the joint income in half will contribute to:
    1) Low income parents will lose grants and scholarships based on their income for their children in college.
    2) Income from dividends and interest cannot be allocated to the lower income partner resulting in higher taxes.
    3) Expenses for the payment of the mortgage and property taxes cannot be allocated to the higher income partner who actually made the payments. In other words the IRS now is trying to say that Domestic Partners must file as single - yet refuses to allow them to take their mortgage interest deduction which they made 100%.
    4) Self employed persons with spouses that get health coverage for them will have their health benefits taxed 100% on one partner’s Federal return and o% deductable on the other partners return. In other words the IRS wins both ways and the taxpayers lose both ways.
    The IRS ruling is twisted and illogical. It only benefits Domestic Partnerships where one partner is rich and the other a stay at home partner. For over 90% of Domestic Partners it will hurt them. Note the 90% figure is my estimate based on over 30 years of income tax preparation.
    My only hope is that the IRS having really messed up its rulings will have to recognize the marriages as marriages and put all this nonsense to rest.
    Sorry but posting must be anonymous to protect me and my clients from IRS retaliation.

    Posted by: anonymous | Jun 18, 2010 10:15:46 PM


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