IRS tax change for DPs causes headaches
by Matthew S. Bajko
It sounds simple enough and could bring a sizeable windfall to many LGBT households in California. The Internal Revenue Service is requiring registered domestic partners and married same-sex couples to split their income equally on their federal tax forms.
Recently the IRS clarified that the new policy will start with the 2010 tax filings. Yet the change in policy toward what is known as community property has been anything but easy to implement. And tax professionals are warning LGBT couples they need to begin thinking about their taxes now to avoid headaches later.
Already, tax preparers have been reporting multiple problems due to the change in policy, from having tax documents returned by the IRS to some couples having to pay substantially more in taxes. There is also more paperwork and calculations involved in preparing the returns, so LGBT couples are also being hit with higher tax preparation costs.
"I have done 70 returns representing 15 or 16 couples. It has not been easy, there have been a lot of delays," said Campbell City Councilman Rich Waterman, a CPA who owns his own firm. "One of the big issues right now is it doesn't look like we will be able to e-file returns. You have to put in by paper and it looks like at least a two- to four-month wait to get any taxes back."
According to California's tax codes, community property is any income each person in a domestic partnership or legally recognized marriage earns during the course of the year. Along with wages, it can include income from a business or real estate holdings co-owned by the couple.
Last May the IRS issued a memorandum stating it would recognize the community property earned by domestic partners in California the same way as it does for heterosexual married couples who file separate federal tax returns. Up until early October the IRS said the new policy would be optional for the 2010 tax filings.
But then the federal agency reportedly switched course, and according to LGBT advocates, it will now be required for the 2010 tax returns due by April 18. (The usual April 15 deadline is being extended this year because of a holiday in Washington, D.C.)
"The info we had from the IRS was that 2010 was going to be optional whether you had to split community income. We then received informal communication from the IRS it was going to take the position that 2010 was mandatory," said Peter Renn, a staff attorney with Lambda Legal Defense and Education Fund. "They say they are not going to issue another memorandum to clarify the issue."
IRS spokesman Jesse Weller told the Bay Area Reporter that he could not comment.
"I would not be able to comment beyond the written guidance," he said.
The IRS did update some of its publications, such as the 1040EZ instructions and Publication 17, and have provided clarification on some of the issues, Renn told the B.A.R. this month.
Specifically, Renn noted that the 1040EZ instructions now state, "A registered domestic partner in Nevada, Washington, or California (or a person in California who is married to a person of the same sex) generally must report half the combined community income earned by the individual and his or her domestic partner (or same-sex spouse)."
And Publication 17 now similarly states, "A registered domestic partner in California, Nevada, or Washington must report half the combined community income earned by the individual and his or her domestic partner."
Renn said the changes in the federal documents are important for several reasons.
"First, the IRS has now confirmed in writing that it considers income-splitting to be mandatory for income earned in 2010 rather than optional. Second, the IRS has clarified that income-splitting applies not only to registered domestic partners in California, but also to registered domestic partners in Washington and Nevada. And, third, the IRS has now indicated that income-splitting applies equally to married same-sex couples and registered domestic partners in California," wrote Renn in an e-mail. "I should note, however, that the IRS hasn't yet completed updating all of its publications, so the issues are continuing to evolve. But what we have seen so far suggests that the IRS is being consistent in how it treats same-sex couples regardless of whether they are spouses or registered domestic partners, and regardless of where they reside, so long as the state at issue has community property and recognizes same-sex relationships."
Next week there will be several workshops for people looking for help in understanding the new tax rules for domestic partners.
On Monday, January 24 local accounting firm Marcum Stonefield is hosting a discussion about the new rules from 5:45 to 7:30 p.m. at the City Club at 155 Sansome Street in downtown San Francisco.
The talk is free but space is limited. To RSVP visit http://www.marcumllp.com/emails/events/IRS_DPPL/irs-dppl-rsvp.html.
The following night, on Tuesday, January 25, Lambda Legal is hosting a workshop about the tax changes. It will run from 6 to 8 p.m. at Covington and Burling, One Front Street, 32nd Floor, in downtown San Francisco.
Panelists will include attorney Frederick Hertz, who wrote the book Making It Legal: A Guide To Same-Sex Marriage, Domestic Partnerships and Civil Unions; Deb Kinney with the DLK Law Group; and CPA Chris Kollaja with A.L. Nella and Co., LLP.
To RSVP, e-mail Anna Wipfler at email@example.com or call 212-809-8585 ext.286.