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Posts for June, 2010

The IRS changes tax rules to recognize CA same-sex relationships

Timothy Kincaid

June 2nd, 2010

For several years, California law has treated couples in domestic partnerships exactly the same as marriages, including in how income tax returns were filed. But the federal government’s DOMA has banned any recognition of same-sex couples as married and the Internal Revenue Service has treated them as though they were two unrelated individuals. This has resulted in the peculiar situation in which a couple files as married for state tax purposes, and then files separate federal returns in which each reports their own individual incomes and deductions.

While it is not true in all cases, quite often this results in same-sex couples paying much higher rates of federal income taxes than they would if they could file jointly, especially when one spouse earns significantly more than the other. It has also resulted in increased time and expense in complying with income tax return preparation.

Now the IRS has issued a memorandum revising its position on the reporting of income from domestic partnerships in California and providing an interpretation that will result in returns that are both easier to prepare and file and also which are more fairly taxed.

Because California is a community property state, and because individuals in domestic partnerships have, since January 1, 2007, had a community property claim on the earned income of their partner for both property law and state income tax purposes, then therefore the IRS has concluded that earned income by either is the joint property of both and should be reflected as such on federal income tax returns.

By 2007, California had extended full community property treatment to registered domestic partners. Applying the principle that federal law respects state law property characterizations, the federal tax treatment of community property should apply to California registered domestic partners. Consequently, for tax years beginning after December 31, 2006, a California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return.

This ruling is required in 2010, and couples may also opt to revise returns for 2007, 2008 or 2009. There are some open questions about non-community property and the treatment of certain deductions as well as variances in state law, so see your tax accountant or attorney for further clarification.

This is very good news for our community.

Many gay couples may find that this will offer a significant tax savings next April. And all of us benefit when our governmental institutions begin to recognize our relationships.