A 2010 IRS ruling has changed how California domestic partners and same-sex married couples file their taxes, potentially offering larger refunds. Yet the Federal change still does not offer the same rights as opposite-sex married couples.
The agency said that all registered domestic partners (RDP) in California must combine their income – known more technically as “Community Property” – and then divide that income equally on their separate tax returns. The change affects nearly 58,000 couples who are registered as domestic partners in California.
“Since California is a Community Property state, the Federal government said we’re basically aligning ourselves with the state. If the state treats it that way, you can treat it that way on a tax return,” said Jeremy R. Dutson, CPA, of Abbas, Jenson and Cundari.
Dutson said the people that can benefit the most are those couples with a disparity in income, where one person makes significantly more money than the other.
“As you increase your income, the higher your tax rate becomes,” Dutson said. By splitting a higher income between two people, each partner would report less income and, “your average effective tax rate is reduced,” he said.
For example, if one partner earned $300,000 in one year, and the other partner made none, then both would be required to file separate tax returns of $150,000. The savings under the new guideline would be more than $15,000. In contrast, there would be no savings if both couples already earned $150,000 each.
Couples that can benefit from the new ruling can amend their taxes for the previous three years. Even though same-sex couples were allowed to register as domestic partners in 2005, the IRS only allows Federal tax amendments up to three years.
The ruling, established in a Federal IRS Court, specifically affects California. A legally-married couple in Berkeley requested the ruling, first during the Bush administration and again this year. The federal decision may also affect couples in Nevada and Washington.
“What they are doing is recognizing gay and lesbian couples who are legally married or registered domestic partners as a cohesive unit. They are actually recognizing these people. Before they did not even care,” Dutson said. “Unfortunately, they are still left at single tax rates, which are much higher than married, filing-jointly tax rates. That is the down side, for sure.”
Dutson recommends married couples and registered domestic partners consult a tax professional for more detailed information and assistance in filing their 2010 tax returns.
