California Domestic Partners Face Tax Changes

A new ruling from the IRS will change how Registered Domestic Partners and same sex married couples in California file their Federal income tax returns. The ruling states that income must be allocated to each partner using community property rules.

This means that each partner will report half of the total community income earned by both partners. Items such as wages, business profits, and most itemized deductions will be totaled up and then divided down the middle. Interest, dividends, rents and capital gains will also be split if earned from community property.

For example, suppose Anthony has $80,000 in wages and Tim has $40,000. In the past each of them would report only his own wages. Under the new ruling, the total wages of $120,000 would be divided and each would report $60,000. The same process would be applied to all other community earnings and deductions.

Not all income however is considered community. Some items considered separate (instead of community) are IRA distributions, social security, and income from separate property.

The new ruling will benefit some couples but will cause others to pay more tax. It just depends on the situation. Couples are more likely to benefit if there is a large difference in income between the two partners that can be split and taxed at a lower rate.

As presently written, the new rules are effective for 2010 tax returns. However the IRS has indicated the change will be optional in 2010 and not required until 2011. This is not yet official, however. If delayed, couples would get to choose whether to apply the ruling for 2010 depending on which way results in less taxes.

For more information please see the SPECIAL SITUATIONS > RDP link on the left.