predict headaches for DPs
by Matthew S. Bajko
Doing one's taxes rarely is greeted with a smile. This year in particular, there are likely to be few happy same-sex couples filling out returns.
For the first time California is requiring same-sex couples who registered their domestic partnership with the state to jointly file their state income taxes. Due to the switch, tax professionals predict gay and lesbian couples will find that calculating their returns this year will be complicated and time-consuming.
"Most of the people are going to be a little frustrated because they are going to have to learn a new way of preparing their taxes," said Karen Stogdill, a tax preparer in Albany. "I think just the fact it is new is frustrating for most people. Taxes, in general, tend to already be frustrating."
Pan Haskins, who specializes in estate planning and tax trusts, said it is not just couples finding the new procedures confusing. She predicted many tax preparers would be just as perplexed.
"For tax preparers it is definitely not going to be somewhat easy. This is going to be very difficult for anyone to handle, especially tax preparers," said Haskins, a lesbian who lives in Oakland. "Until our relationships are recognized at the federal level, this is going to be an administrative burden and it is going to cost people more."
The cause of all this confusion was the passage of SB1827, the State Income Tax Equity Act of 2006, six years after the state created its domestic partner registry. The bill required DPs registered with the state to jointly file their state taxes beginning with 2007 returns.
LGBT tax professionals and state tax officials have spent the last year trying to determine how to implement the switch. Many tax professionals are just now catching up on the new requirement as they attend education classes about changes to the tax codes.
Several gay and lesbian tax preparers contacted by the Bay Area Reporter predicted that most accountants have yet to fully prepare themselves to handle the new requirement.
"Most of the general tax practitioners down here are not prepared for this. We had a general training a couple weeks ago where 300 CPAs showed up and they blew past this part," said Rich Waterman, an openly gay certified public accountant in Campbell in the South Bay. "When you start getting down to the nitty-gritty of what it means, it is quite confusing, depending on the issue."
Stogdill, who herself is in a domestic partnership, said half of her clientele are also domestic partners. She has spent the last year closely following how the state planned to implement the change and has taken part in several meetings in Sacramento with state tax officials in order to address various issues.
"I think most tax people who are themselves gay or lesbian have been paying attention," she said. "I think most other preparers have just heard about it or absorbed it for the first time when they went to continuing education classes."
San Francisco-based CPA Herb Cohn, a gay man whose office is in the Castro, said he was at a tax update seminar in Palm Springs and had to press the instructor to spend more time discussing the new rule for DPs.
"We are doing our best to get ourselves up to speed," said Cohn, who said that, for the most part, it would not impact many of his clients. "I do have clients to which it does apply. The logistics of it and the mechanics of it are very confusing."
Haskins said it is to be expected that any change to the tax codes will be problematic to implement.
"What's out there is still lacking because we are still making it up as we go," she said. "Tax law is complicated. When you have a new law it has to be interpreted and that often takes time."
She, too, took part in the planning process over the last year for instituting the new tax rule. She complimented the state for reaching out to LGBT tax preparers for help in figuring out how to enact the change.
"They have made an incredible effort at responding to this law, implementing it, and responding to how to deal with it," she said.
Advice for DPs
Tax preparers who have been closely involved in the planning for the new filing requirement do have some advice for DPs. The first step couples should take is to call the secretary of state's office to ensure they are indeed registered DPs. It could be that many DPs only registered with the city they live in and not with the state, especially if they became DPs prior to the creation of the statewide registry.
If a same-sex couple is registered with the state, then they should first prepare a joint federal return in order to determine their federal adjusted gross income. That information will then be used to file their joint California return. Once the state taxes are filed, then each partner will have to prepare separate federal returns.
"The California return works off a federal adjusted gross income. Since federally domestic partners can't file jointly, in effect, we have to create a phantom return. That is how I understood most tax professionals will be doing it," said Cohn. "You have to charge more money for it. It is not like doing two returns; it is like doing three returns."
The Franchise Tax Board has created a special document, called DP publication 737, to help DPs go through the process. But already, Stogdill and Haskins have notified the tax board of problems they have found in the document.
"They said they are open to feedback and will revise the form as necessary," said Stogdill.
She recommends people first go to the tax board's Web site and look at the most recent publication of 737 before they do their returns.
For those DPs who have fairly easy tax returns, they should be able to still do their taxes on their own or by using computer software such as TurboTax, said Stogdill. The process will take more time, but it should not be so taxing that they need to seek professional assistance, she said.
"It is definitely possible for them to continue to do their own if they don't have a complicated situation," she said. "TurboTax has said their software can handle it. I think it will work."
Julie Miller, a director with TurboTax, said the company's products have been updated to reflect the DP tax change. She said there are now extra steps DPs will have to take when using the software to determine their tax returns.
"TurboTax will walk you through it. It is designed to make even the most complex tax law changes easy for people," said Miller. "We try to use simple questions so you can get through the process as easily as possible."
Yet Haskin questioned if the software, for the public as well as tax professionals, is capable of dealing with the change.
"None of the software for tax professionals or tax preparation is really addressing this adequately. So it is really going to be a challenging thing to prepare domestic partners' taxes," she said. "There are people who are DPs who have done their own returns turning to tax professionals. I am getting a lot of calls and am referring them."
Any couples with complex tax issues to deal with, particularly if they have community property between them, may need to seek professional help. For those people who do decide to work with a tax preparer this year, they should find one as soon as possible, as many CPAs and other tax preparers are already turning away callers.
Waterman held a seminar on the tax change last November at the Billy DeFrank LGBT Community Center in San Jose where 150 people turned out. He said normally his tax sessions draw a crowd of about 40.
"It is starting to get a little busy. The phone has been ringing pretty consistently," said Waterman.
If people do contact a CPA, Stogdill advises they make sure the person is familiar with the new requirement for DPs.
"I would advise they ask their preparer, 'Am I your only registered domestic partner client?' If you are, you might not get the kind of service you may require this year," said Stogdill. "The other possibility is if people go to H&R Block or Jackson Hewitt, they should go to the offices closest to the Castro or Mission. Those are offices that will likely see a lot of these returns."
For those DPs who have been using separate tax preparers, they will have to pick one to work with this year.
"This year, almost certainly, they will have to go to one person," said Stogdill.
Tonight (Thursday, January 24) state tax officials are hosting a meeting for domestic partners in San Francisco from 6 to 8 p.m. in the Milton Marks Conference Center in the basement of the state office building at 455 Golden Gate Avenue. Registration begins at 5:30 p.m. for the forum.
To download and print out the Franchise Tax Board's DP publication 737, go to www.ftb.ca.gov