tax resource 2011

8/7/2019 Tax Resource 2011

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Changes in Federal Tax Regulations for Registered Domestic Partners

By Sandee Hill, The Financial Fitness Center

A private letter ruling issued in May 2010 by the Internal Revenue Service dramaticallychanged the manner in which Registered Domestic Partners (RDP) in the states ofCalifornia, Nevada, and Washington or same-sex married couples in Californiafile theirfederal tax return. As a result, RDPs and same-sex married couples in California mustfollow these new regulations for filing their Federal tax return. Heres what you need toknow if you live in one of these states.

A private letter ruling is a written response from the IRS issued to a taxpayer inresponse to a written inquiry by, in this case, a California taxpayer. This interpretationby the IRS of the facts presented by a taxpayer then become applicable to thattaxpayer. However, others may also use that interpretation to request the same results.Taxpayers in these three states have requested this same interpretation and the IRS isapply the ruling to all who legally qualify.

Why only these three states? These rules apply to RDPs in Nevada, Washington, andCalifornia in 2010 because these states have full community property rights as of 2010.California RDPs attained these rights as of January 1, 2007. Nevada RDPs attainedthem as of October 1, 2009, and Washington RDPs attained them as of June 12, 2008.

RDPs (and individuals in California who are married to an individual of the same sex)are not married for federal tax purposes. They can use only the single filing status, or ifthey qualify, the head of household filing status. Furthermore, California givesregistered domestic partners the right to enter into agreements identical to premaritalagreements between prospective spouses, to modify or avoid the application of thecommunity property. 1


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Under Chief Counsel Advice (CCA) 201021050 (pdf, 3 pages), the IRS determined thatindividuals who are registered domestic partners in the state of California will need tofollow the state's community property rules when reporting their income and deductionsfor federal tax purposes. This is the IRS ruling that now also applies to Washington andNevada. This will mean each partner will report one-half of their total combined incomeand one-half of their total combined deductions.

The IRS has published a comprehensive document on the community property law andhow it affects RDPs and same-sex married couples. How to report community propertyfor federal tax purposes is detailed in Publication 555, Community Property.

These rules took effect on June 1, 2010 and are effective for the 2010 tax return.California registered domestic partners may amend previously filed returns to reportcommunity property income and deductions going back to the year 2007.

1Internal Revenue Service Department of the Treasury, Washington, DC 20224. Number: 201021048Release Date: 5/28/2010 Index Number: 31.00-00, 61.00-00, 61.30-01, 2501.00-00.

2Internal Revenue Service Department of the Treasury, Washington, DC 20224. Publication 555

Gay and lesbian married couples still cannot file a federal tax return using the married-filing-jointly or married-filing-separately statuses, although nine states do permit gaycouples to file jointly. The states are Massachusetts, Vermont, Connecticut, Iowa, NewHampshire, California, Oregon, District of Columbia, and New Jersey. See 10 StatesAllow Same-Sex Couples to File Joint Returns for details.

A comprehensive article, The IRS Applies Income-Splitting to Californias RegisteredDomestic Partners and Same-Sex Spouses (and Now RDPs in Washington andNevada, too!) was written by Lambda Legal and provides extensive information. Clickhere to read the full article.

According to Lambda, This represents a step in the direction of treating same-sexcouples who have formalized their relationship under state law the same as marrieddifferent-sex couples. The change is welcome progress towards our communitys goalof full legal equality for same-sex couples, even though it makes preparation of taxreturns more complicated for many couples during this period of change. In addition,although the change likely will result in higher income taxes for some same-sexcouples, it is anticipated that many more couples will see a decrease in their incometaxes. 3

Who Must File These rules apply to RDPs in Nevada, Washington, and California in 2010

because they have full community property rights in 2010. California RDPsattained these rights as of January 1, 2007. Nevada RDPs attained them as ofOctober 1, 2009, and Washington RDPs attained them as of June 12, 2008.

Please consult your states Community Property laws for specifics if you live inone of these three states.

o California Tax Information for Registered Domestic Partners.http://www.ftb.ca.gov/forms/2010/10_737.pdf


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o Washington Registered Domestic Partners rights page 9http://dor.wa.gov/docs/reports/2008/summary_2008_tax_leg/2008-legsummary.pdf

o Nevada Legislative Summaryhttp://www.leg.state.nv.us/75th2009/Bills/SB/SB283_R2.pdf

On the Federal tax return for the years 2007, 2008, 2009, RDPs who reportedincome without regard to the community property laws may file amended returnsto report half of the community income of the RDPs for the applicable periods,but are not required to do so.

o Those who would benefit most would be RDPs whose income is high forone partner and lower for the other.

o If one of the RDPs files an amended return to report half of the communityincome, the other RDP must report the other half.

3The IRS Applies Income-Splitting to Californias Registered Domestic Partners and Same-Sex

Spouses (and Now RDPs in Washington and Nevada, too!) by Lambda Legal-------------

o It is important for RDPs to consult with a tax professional to determinewhat deadlines might apply in their particular circumstances.

o The deadline to file an amendment to the 2007 Federal tax returns is April15, 2011,

What this means for you: RDP taxpayers must combine their wages, self-employment and shared asset

income and split it 50-50, per community property laws. RDPs will then have toreport half of the combined income on each of their individual federal tax returns.

o Community Property is property that you, your spouse (or RDP/Californiasame-sex spouse), or both acquire during your marriage (or registereddomestic partnership/same-sex marriage in California) while you lived in acommunity property state. And property that you and your spouse (orRDP/California same-sex spouse) agreed to convert from separate tocommunity property. 2

Each taxpayer will be entitled to split the income tax withholding from the wagesor from the quarterly estimated payments made by each Taxpayer and DomesticPartner.

o Community income is income from: Community property. Salaries, wages, or pay for services of you, your spouse (or

RDP/California same-sex spouse), or both during your marriage (orregistered domestic partnership/same-sex marriage in California).

Real estate that is treated as community property under the laws ofthe state where the property is located.

o Separate income is: Property that either person owned separately before the marriage

or domestic partnership. Money earned while living in a non-community property state. Property either received as a gift or inheritance. Property, or part of property, bought with non-community funds.


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Income derived from assets held outside the marriage i.e. inheritance or

assets acquired prior to the marriage or with separately held money will be

reported solely by the taxpayer who holds those assets as they are not

community property.

If one of the RDPs files an amended return to report half of the community

income, the other RDP must report the other half.

Conclusions

At present, California, Nevada and Washington are the only states that recognize same-sex relationships comprehensively under state law andhave communityproperty, whichapplies to same-sex and different-sex couplesalike once that relationship is recognizedunder state law. So, same-sex couples in states otherthan California, Nevada, orWashington appear to be unaffected by these recent IRS tax regulations.

Whether and how the new IRS position is likely to apply to other community propertystates (Arizona, Idaho, Louisiana, New Mexico, Texas, or Wisconsin) will depend onhow the state itself applies its community property laws to same-sex couples. Theapplication of these new IRS tax laws on states that may enact RDPs and same-sexmarried couples legislation will differ from state to state. Therefore, at this time, it isdifficult to know how the Federal tax laws will apply.

For now, those RDPs and same-sex married couples living in the states of California,Nevada, or Washington must follow the new IRS regulation on Federal tax returns. If atall possible, it is best to consult a tax professional in your state that is familiar with theseIRS changes. The Financial Fitness Center in Oakland, California is an RDP taxspecialist and can also help you with filing amendments to your 2007, 2008, or 2009Federal tax returns. See our websites: http://www.rdptaxspecialists.com/orhttp://www.financialfitnesscenter.com/new/finfit/ .

Key Resources:

IRS Publication 555 Community Property:http://www.irs.gov/publications/p555/index.html

Lambda Legal. The IRS Applies Income-Splitting to Californias RegisteredDomestic Partners and Same-Sex Spouses (and Now RDPs in Washington andNevada, too!) http://data.lambdalegal.org/publications/downloads/fs_the-irs-

applies-income-splitting-community-property.pdf Pillsbury Law. Advisory - Recent IRS Rulings Clarify Tax Treatment of

Registered Domestic Partnershttp://www.pillsburylaw.com/index.cfm?pageid=34&itemid=39698

tax resource 2011

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