Registered Domestic Partner-Same Sex Married Couple Tax Filing Q&A's

Same Sex Couple Tax Filing Answers

2010 was the first tax season in which gay and lesbian registered domestic partners or same sex married couples were required to file federal income tax returns reflecting community property rules. Effective with the June 2013 Supreme Court decision that invalidated many of the key parts of DOMA, legally married same-sex couples will need to file jointly starting in 2013, with an option of amending past years, rather than having to file under the community property laws covered below and in IRS Publication 555.  Here are some common questions and answers about the filing requirements for Registered Domestic Partners.

Why the change?

In May of 2010, IRS chief legal counsel issued a memorandum (CCA 201021050, May 5, 2010) stating that “Federal tax law generally respects state property law characterizations and definitions”. What that means is that if a state recognizes property as community property, then the Federal government has to defer to this. As such, this means income and deductions that are considered community property should be shared 50/50.

What About the Recent Supreme Court Decision?

The Supreme Court decision was great news, and long overdue!  It not only invalidated DOMA's definition of marriage as being "between a man and a woman", but the Treasury Department confirmed that it (and the IRS) will "recognize validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriage”.  To clarify, this means that if you were married in the state of Washington and moved to Utah, the IRS would still consider you legally married.  It also notes that if you were legally married in Canada or Spain for example, the IRS would still consider you married for US tax purposes. 

However, this ruling only applies to legally married same-sex couples, and NOT registered domestic partners.  This means if you and your partner registered as domestic partners and have not yet, nor plan to legally marry by the end of 2013, your returns will be filed as they have been for the last three years using the community property laws and splitting all community income and deductions.  

What questions should i ask a tax professional if i Do not Want To Prepare my Own Return?

If you are planning engage a tax professional to prepare your tax return, you want to make sure they know what they are doing.  They might have 25 years of tax preparation experience, but if they don't have experience relating to RDP and Same Sex Married Couple's tax returns, there are lots of ways to make mistakes.  Here are three questions to ask to help you interview prospective tax professionals:

  1. How many RDP/Same-sex couple returns do you prepare each year? If they do less than 50, they may not have the experience required, or be current with the updated procedures.
  2. How do you determine what is community property and what is not?  Because community property is at the core of this new procedure with the IRS, this should be an easy answer for someone with RDP return experience.  Their answers should address some of the items noted in  Understanding Community Property.  You don't have to memorize this list, but just pay attention to the confidence in how they answer, not just the words. 
  3. How have you handled IRS notices received by your RDP clients?  If they have prepared more than 50 RDP returns for the past few years, at least a few of their clients would have received some sort of notice from the IRS, because frankly, the IRS staff is still learning the new process. They should give you an answer that highlights their experience, and success rate in this area.  At RDPTaxes.com, we want to make it worry-free for you, so we take care of it for you and do not charge extra for responding to these notices.

What is community property?

That is too big a subject for a simple FAQ, so please see Understanding Community Property for more details.

Does this impact me?

The memorandum was specifically created in relation to California registered domestic partners. However, more recently in IRS Publication 555, it has been expanded to clarify that you are impacted if you live in a community property state that recognizes your domestic partnership. This would include registered domestic partners in California, Nevada and Washington.

Does this mean these couples file joint returns?

Legally married same-sex couples will need to file jointly for the 2013 tax year and after, thanks to the recent June 2013 Supreme Court decision.  This does NOT apply to civil unions or registered domestic partnerships.  As a registered domestic partner, you have to file your federal income tax return as a single individual (or possibly head of household, if you have dependents) under community property rules, even if you are able to file jointly on your state income tax return.  

Then how does this make a difference?

First, remember that starting with tax year 2010 and after, it is required. However, some of my clients have seen huge windfalls as a result. The difference comes when you split the income, and the potential ability to shift income from the higher earning partner’s marginal tax rate to his/her spouse’s/partner’s lower marginal tax rate.

Example: Let's say that Bryan earns $110,000 of taxable income in 2011, and his partner, Lawrence, is a stay at home Dad, who had $3,200 of taxable income in 2011. Previously, the IRS considered them unmarried for tax purposes, so Bryan and Lawrence would each pay income taxes on the money each of them actually earned. So for Bryan, who earned $110,000 of taxable income, the first dollar would be taxed at 10%, and the last dollar would be taxed at the 28% marginal tax bracket. His tax due would be $24,509, with an average or average tax rate of 22%. For Lawrence, all of his $3,200 in taxable income would be taxed at 10%, for a tax bill of $320, resulting in a combined tax bill for their family of $24,928.

With this new ruling, they would still have to file their federal taxes as single individuals, but Bryan and Lawrence's income would be combined, and divided evenly between them. This would mean they would each report $56,600 ($110,000 + $3200 divided by 2) of taxable income, with taxes due of $10,331 each, for a combined tax bill for their family of $20,662, saving over $4,000 in income taxes.

Can I e-File my tax return?

If done correctly, this should be possible.  For the 2012 Tax Year and later, the IRS has a new form that is required, Form 8958, Allocation of Tax Amounts Between Married Filing Separate Spouses or Registered Domestic Partners with Community Property Rights.  This must be completed and included with the return, in order to let the IRS know who earned what, and how it is divided, so it can be matched to the income and deductions reported to the IRS.  Otherwise, prepare for the dreaded CP2000 "matching" notices from the IRS. 

I have always claimed my partner as a dependent; can I still do that?

No. Because both partners will have income (potentially equal amounts of income) they would no longer be eligible to be claimed as a dependent. However, the benefits of filing under the new requirement far outweigh the tax benefits from claiming them as a dependent. In fact, generally, the largest refunds I have been able to get for my clients are when one spouse works, and the other does not, simply because of the ability to move income from a high tax bracket to a low one.

I have a dependent; can I still file as Head of Household?

Yes, this can still be possible, but it is tricky. The trickiness is that to qualify for Head of Household, one must provide more than 50% of the support for the household. Following the new guidelines, if you split your income evenly, each partner will have exactly 50% (not more than 50%), which would not qualify for the Head of Household status. That said, it can be done, and I have done this for my clients. It involves making sure that one of the partners as some additional income that is separate (not community) and/or pays for some part of the household expenses with separate funds, if available. As said, it is tricky, but can be done, so just ask me how.

What about amending past year's tax returns?

Because the requirement for registered domestic partners to file splitting the community income has been in place since the 2010 tax year, most of the opportunities to amend don't exist any longer. However, if you did not file your 2010-2012 tax returns under the community property laws, it may be beneficial to do so (technically, it is also required!).  Contact us now to inquire about our Review Service to check past year’s returns to see if it makes financial sense, and provides a significant refund. Both partners would be required to amend, as the income shifting impacts both tax returns. The IRS allows us to amend tax returns going back three years, so for this year, that means we can still amend 2011, 2012, and 2013. The deadline for amending timely filed 2010 tax returns was April 15th of 2014, but if you filed late that year, you may still have time.  If it seems like it would help you, contact us right away.

Should we Get Married or become registered domestic partners to take advantage of the new tax filing rules?

I never recommend you make relationship decisions based on tax advantages. That said, if you have considered getting married or becoming registered as domestic partners, then what’s stopping you? If you want to consider the impact, we offer planning services and can quickly give you the pro’s and con’s from a tax perspective. Contact us today to get that started.