Category Archives: RDP Tax Returns

Same-Sex Couples in Non-Recogntion States Required to Prepare Multiple Federal Tax Returns

24 Friday Jan 2014

Posted by in Marriage, RDP Tax Returns, Taxes

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I haven’t posted in a while, as is usual for this time of year.  The New Year signifies many things for many people.  For me, it mostly signifies the beginning of tax season.  This year, there are also significant changes for me personally.  I have moved on from my previous firm and started my own.  I am now offering services through Advocate Accounting, LLC.  This is an exciting new change for me and I hope the New Year is just as promising for you.

When it comes to taxes, as always, there are important year-end changes of which you should all be aware.  The media coverage of the recent Supreme Court (SCOTUS) decision on DOMA has been widespread.  I posted about it when it occurred back in ­­­­­August.   An avalanche of rights have since been awarded to same-sex couples.  Among these is the right, and requirement, to file your Federal income taxes as Married Filing Joint (MFJ) or Married Filing Separately (MFS).

The IRS’ decision to use the “place of celebration” definition of marriage was a big win for the community.  It means that same-sex married couples (SSMCs) will be recognized as married if they have a marriage license from any marriage state, regardless of where they live.  This has both positive and negative tax effects at the federal level. Luckily, there are accessible resources explaining both.

At the state level, however, the effects are less known and highly variable. If you are a SSMC living in a state that recognizes your marriage (or you live in a non income-tax state) you have nothing to worry about. Those who have a legal marriage but reside in a non-marriage or non-recognition state are in a different boat, though, and are subject to yet another tax inequity.

Most income-tax states require that a taxpayer submit a copy of their federal tax return along with their state return.  The numbers from the state-submitted 1040 are used to calculate the state tax. Before the DOMA decision, SSMCs in marriage/recognition-states had to prepare three 1040s – two Single returns to be submitted to the IRS and another “dummy” Joint return to be submitted to the state. This was the case in states such as Oregon and California where joint filing was available with the state, but not with the IRS. A reverse situation now applies to a far greater number of taxpayers.

If you are married, but live in a non-recognition state, you may now be faced with the burden of preparing three Form 1040s. You will need to file one MFJ return, to be filed with the IRS, and two Single “dummy” 1040s to be filed with the state. Lambda Legal has an excellent list of marriage rights by state that can be found here.

Despite the enormous progress that has been made, inequity still abounds. Many attorneys speculate that a new SCOTUS case will emerge within the next 18 months.  The clear deficiency of the decision is an issue that people will not ignore.  Brace yourself, the marriage equality fight is far from over.

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IRS Will Recognize All Legal Same-Sex Marriages – Regardless of State of Residence

29 Thursday Aug 2013

Posted by in Financial Planning, Marriage, RDP Tax Returns, Taxes

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The IRS announced today that all legal same-sex marriages will be recognized for Federal Tax purposes.  The looming question about whether the IRS would use the state of domicile or the state of celebration to define “legal marriage” has been answered.  They have chosen the state of celebration which means IRS marriage recognition will be based on where the marriage license came from, not where you live.  This isn’t surprising since it makes the most sense for all parties and lessens the burden to both taxpayers and the IRS. Additionally, it ensures consistent federal taxation to all same-sex married couples (SSMCs)

If you are a SSMC, you are now able, and required, to file as Married Filing Joint (MFJ) or Married Filing Separately (MFS) for tax year 2013. The IRS is also allowing, but not requiring, SSMCs to amend prior year returns to MFJ/MFS.[i]  The change in tax status will have varying impacts on taxpayers.  Those couples in which one spouse earns a majority of the income will likely see a benefit while those couples in which both spouses are high earners may see an increase in tax.

For tax purposes, you will be treated as married for the entire year regardless of what date you were married.   Here are some of the things that should be considered in your tax planning:

W-2 Withholdings

Now that you can file MFJ, adjustments to your W-2 withholding for federal income tax may be needed. Whether and how to adjust your withholding will depend on your particular tax situation. You can use the IRS withholding tables to estimate what your withholding should be as a MFJ taxpayer.  Comparing these amounts with your year-to-date withholding from your pay-stub will help you to determine what withholding is needed for the rest of the year.  Wage withholding is only one piece to the puzzle, though. Talk to your tax preparer to plan for your overall tax picture.

Employer Provided Health and Other Benefits Covering Your Spouse

Before the DOMA decision, and today’s IRS announcement, certain employer-provided benefits covering same-sex spouses have been included in taxable income.  Thankfully, this is no longer a correct treatment of these benefits.  If this situation applies to you, a conversation with your employer may be warranted.  Find out if and when they will stop withholding tax on these benefits.  Make sure to ask them whether you can take advantage of any available benefits immediately or if you’ll have to wait until the next open enrollment period.

IRA Contributions

Now that same-sex spouses are actually considered spouses by the IRS you may be newly eligible to make tax-deductible contributions to a Traditional IRA.  Late last year I posted about your prior inability to do this.  If you have no earned income (taxable compensation) and have thus been ineligible to contribute, you can now use your spouse’s earned income to qualify you for this benefit.  There are other applicable restrictions, however.  Here is a link to more information on Traditional IRA contributions.

Amended Returns

Those couples who will benefit from filing as MFJ should consider amending their prior open-year returns.  An “open-year” return is a return for a year that has not yet passed the  three-year statute of limitations for amending. The three years begins on the date the return was filed.  For most taxpayers this means that 2010 will be as far back as you can go. Luckily, those who will not benefit from MFJ status are not required to amend prior year returns at all.

[i] If you have a legal marriage and your 2012 return is still on extension, you can file MFJ/MFS for tax year 2012.

DOMA is Dead – To Wed or Not to Wed; that is the Question

28 Sunday Jul 2013

Posted by in Legislation, Marriage, RDP Tax Returns, Taxes

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With the fall of DOMA has come a rush of same-sex couples (SSCs) converting their partnerships into marriages.   It is an emotional time, especially for those who have waited for over thirty years to make that change.  I have been to three weddings since the fall of DOMA and have five more between now and the first week of September. Put simply, it is inspiring and I am proud of these couples.  Despite the pride and emotion we are all feeling, though, I urge all couples to proceed with caution.  The right to marry, and to be recognized as a spouse, comes with changes that are worth consideration.

The media has been quick to discuss a few of the enormous benefits of marriage, particularly in the context of health, retirement and Social Security benefits.  There has even been the occasional reference to the presumed right to file as married filing jointly (MFJ) in 2013. However, there are still questions on how, and to whom, these changes will be applied.

Despite the IRS’ immediate promise to “move swiftly,” they have not yet issued any statements about how they will implement the Supreme Court decision. We can be confident that the IRS will allow SSCs to file jointly if they have a valid marriage license by the end of 2013. The question then is what will be considered a valid marriage license. The answer hinges on whether the IRS will use the state of domicile or the state of marriage in determining who has a valid marriage license. While we wait for the IRS to make an official statement, the more pressing question for many is whether or not to get married at all, and if so, when.  Emotion and celebration aside, the tax implications of marrying in 2013 are significant.

The ability to file MFJ will not be beneficial across the board. Some couples will realize a benefit in their total income tax and others will not.  Generally, if there is only one earner, MFJ status will be financially beneficial.  Others will experience what is known as the “marriage penalty” and end up with a higher tax bill when filing MFJ. This usually occurs when each spouse is an earner and the combining of income pushes the couple into a higher tax bracket.

The combining of incomes may also push many couples to an adjusted gross income (AGI) level that excludes them from tax deductions and credits that they have been able to claim in the past. For example, in 2012, many single taxpayers were eligible for the Child Tax Credit as long as their AGI was below $75,000, the beginning phase-out amount for a single taxpayer. If in an RDP couple each partner had a child and each partner had an AGI of $60,000, it’s possible that they could each claim the credit.  The 2012 AGI phase-out for married taxpayers began at $110,000. In this example, if the couple was married, their AGI would be $120,000 and they would only be eligible for a reduced credit or, in some cases, none at all. Eligibility for many deductions and credits are determined by AGI and, unfortunately, the MFJ phase-out amounts are not equal to double the single amounts.

It is important to remember, too, that some of the discriminatory tax laws actually benefit unmarried couples. Perhaps the most significant is the adoption credit. My earlier post, The Adoption Tax Credit – One Good Thing the Defense of Marriage Act did for Registered Domestic Partners, goes into the details of why registered domestic partners benefit from the adoption credit in a way that spouses do not.    If you are planning on adopting a child, and are not yet married, you may want to consider completing the adoption in 2013. If the potential tax benefit of the adoption credit exceeds the combined benefit from other changes, it may behoove you to adopt in 2013 and marry in 2014.

No matter when you decide to tie the knot, it is important to be prepared.  A quick review of your tax situation can give you the information you need to be ready for the changes to come.  A small amount of planning can go a long way.

Supreme Court to Hear DOMA Case on March 27th: Same-Sex Married Couples Able to File Jointly in 2013?

23 Saturday Mar 2013

Posted by in Law Suits, Legislation, Marriage, RDP Tax Returns, Taxes

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The time has finally come. On March 27th, the Supreme Court will hear a case challenging the constitutionality of DOMA. Many have come forward over the last year in support of overturning the Act. Support has ranged from progressive LGBT rights advocates to President Barack Obama himself. Most recently Bill Clinton, the man who signed DOMA into law in the first place, has come forward.

When I signed the bill, I included a statement with the admonition that “enactment of this legislation should not, despite the fierce and at times divisive rhetoric surrounding it, be understood to provide an excuse for discrimination.” Reading those words today, I know now that, even worse than providing an excuse for discrimination, the law is itself discriminatory. It should be overturned.

So, what if it is overturned? How would such a decision impact same-sex married couples’ tax position and how long will it take for those changes to take place? Frankly, I expect the implementation be slow and burdensome. The IRS made a small change for a small portion of same-sex coupled taxpayers three years ago and we still don’t have official rules.

Not only will it take time for Congress to amend laws and regulations, it will take the IRS time to amend tax forms and procedural guidelines.  Furthermore, if spouse is no longer defined to only include opposite sex partners but applies to all couples who have a valid marriage, how will “valid marriage” be defined and how will the IRS know who has one? The easy answer would be any couple married in a legal marriage state. Only it’s not that simple, is it?  Many couples hold marriage licenses from legal marriage states but live in states without same-sex marriage. The issue is further convoluted when considering the varying recognition laws in each state.

I can only hope that the fall of DOMA will lead to blanket legal marriage across all states. Until then, I truly don’t understand how the IRS will determine which couples have the right to file jointly and I fear that they are no better prepared for such a change than they were for community property income splitting. I suppose the upside of this is that the delay in implementation will provide same-sex married couple taxpayers ample time for tax planning.

Just as it is with community property income splitting, the change will benefit some taxpayers and harm others.  For those of you that will not see a tax benefit from joint filing it may behoove you to start planning now. For those that will benefit, the question of amended returns arises. If DOMA is ruled unconstitutional it means it was always unconstitutional. To me, this suggests the right to amend prior year returns with married filing jointly status in order to cash in on the refunds you should have already received.

Only time will tell how this will all unfold, but my fingers are crossed.  I am grateful to witness and be part of such inspiring and historic accomplishments in equal rights.

National Taxpayer Advocate Urges the IRS to Issue Guidance to Domestic Partners and Same-Sex Married Couples

19 Tuesday Feb 2013

Posted by in Community Property, Legislation, RDP Tax Returns, Taxes

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The National Taxpayer Advocate Center is an office within the IRS designed to aid taxpayers in resolving their tax issues. They share responsibility with the IRS for evaluating systems and procedures. Each year the Taxpayer Advocate issues an annual report to Congress in which they make recommendations for improvements and identify systematic deficiencies.

The 2012 Annual Report submitted to Congress once again contained a request that the IRS provide authoritative guidance to domestic partners (DP) and same-sex couples (SSC). They have made this request each year since 2010 when new filing requirements were first implemented for DPs and SSCs living in community property states (CA, WA and NV).

To date, the only guidance the IRS has provided is an FAQ page that is periodically updated. The FAQ page is sadly insufficient however.  It excludes several issues that many DPs and SSCs face. Additionally, since the FAQ page is not authoritative it leaves over a million taxpayers in the position of being required to follow procedures to which there are little to no official rules. These taxpayers are thus forced to attempt to interpret the requirements on their own, or seek professional help from a tax advisor.

Each year the IRS has responded to the National Taxpayer Advocate Center with a claim that issuing guidance would be premature.  Their reasoning is that the political landscape surrounding DPs and SSCs is changing too rapidly and it would affect an “insignificant” number of taxpayers. While I do understand that until the Supreme Court rules DOMA unconstitutional the IRS’ rule making abilities are limited, I find it highly offensive to disregard the needs of over a million taxpayers because they are deemed “insignificant.” Meanwhile, the IRS has delayed tax return processing for the majority of Americans because of disputes on legislation that affects the small amount of taxpayers earning over $400,000/year.

The Taxpayer Advocate report also noted that data from the 2010 Census revealed an increase of documented DPs and SSCs of 100%. Since then, over five states have enacted legislation enabling Domestic Partnerships and/or Same-Sex marriages.  How many couples must there be before the IRS will help taxpayers? How many times must the Taxpayer Advocate urge Congress to enable the IRS to establish and implement authoritative guidance? Despite its apparent lack of effectiveness, it’s nice to know that someone is speaking up for DPs and SSCs. Thanks Taxpayer Advocate.

Loss of Head of Household Filing Status for Registered Domestic Partners in Washington and Nevada and Same-Sex Spouses in California

01 Saturday Sep 2012

Posted by in Community Property, RDP Tax Returns, Taxes, Washington

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As taxpayers we are always looking for ways to keep more of our money.  If you are unmarried, one of the easiest ways to save on taxes is to file as Head of Household (HOH) instead of Single.  The HOH filing status has both lower tax rates and a larger standard deduction. Together, these advantages can have a significant impact on your tax bill.

RDP taxpayers have been claiming HOH status under varying circumstances for many years.  Some have a child living in the home while others have been claiming their non-working spouse as a dependent in order to meet HOH requirements.  In some cases, though technically incorrect, RDPs have even both filed as HOH when the couple has more than one child.

There are certain requirements, commonly referred to as “tests,” that must be met in order to claim HOH status.  Unfortunately, the community property income splitting rules have caused most RDPs to suddenly fail to satisfy the requirements.

There are three tests and they must all be met to qualify for HOH status:

  1. Taxpayer must be unmarried, or “considered to be unmarried.”
  2. Taxpayer must pay for more than half the cost of keeping up the home.
  3. Taxpayer must have had a “qualifying person” (usually a child) living in the home more than half of the year[i].

The first test remains easy to meet since under all circumstances RDPs are still legally single for tax purposes. If you have a dependent child, the third test also remains easy to meet.  In most cases however, if you don’t have a child you will no longer be able to use your dependent partner to satisfy the third test. There are additional tests to meet in order to claim a dependent partner as a qualifying person. For purposes of this discussion, only one of these tests is relevant.  The partner must have gross income of less than $3,700; this is known as the “gross income test.”

Now that wages, and most other types of income, are reported 50/50 between the partner’s two returns, it is almost certain that both partner’s incomes will exceed $3,700[ii]. With no child or partner who can be considered a qualifying person the third HOH test is not met and the taxpayer must file as Single.

The more common, yet less complex, reason for losing HOH status is failing to meet the second “cost of keeping up the home” test.  Since, typically, under community property rules all income is split 50/50, neither partner can qualify as paying for more than half of the cost of keeping up the home.  HOH status is lost and both partners must file as Single.

Luckily with some strategic planning, assuming the first two tests are met, there are ways to ensure that one partner can still file as HOH.  All that is needed is any amount of separate income.  If one partner has separate income, then their share of total income will be greater than 50% and may then justify the claim that they provide more than 50% of the cost of keeping up the home.

What is separate income then? There are several income sources that are intrinsically considered to be separate:

  1. Income from an inheritance provided that the underlying assets earning the income have remained physically separate and have not commingled with community property assets.
  2. Distributions from retirement funds that were earned, partially or wholly, prior to registration or marriage.
  3. Distributions from IRA accounts are always considered separate regardless of whether they were funded by property otherwise considered as community.
  4. Social Security benefits that were earned, partially or wholly, prior to registration or marriage.

There are a number of other grey area income sources, such as Health Savings Account distributions, to which the IRS has made no comment.  Income may also be designated as separate by creation of a separate property agreement. Regardless of the source of the separate income, having it or creating it can be a financially rewarding planning strategy. You may want to consult your tax professional to determine how, and if, you can maintain your eligibility to file as HOH.

[i] There is an exception to this rule. If you have a parent that you can claim as a dependent, they do not have to live with you.

[ii] This creation of reportable income also usually means that the non-working spouse must now file their own tax return when they didn’t before.

The Adoption Tax Credit – One Good Thing the Defense of Marriage Act did for Registered Domestic Partners

31 Thursday May 2012

Posted by in RDP Tax Returns, Taxes

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Despite the adverse effect that the Defense of Marriage Act has on millions of LGBT people, there is one instance in which it helps.  That instance is the availability of the Adoption Tax Credit to those who adopt their partner’s children.  This of course only applies to those living in states that allow second-parent adoptions; but still, this one bit of law provides a benefit that would be otherwise unavailable if same-sex marriage was federally recognized.  Let me explain.

The Adoption Credit is intended to provide financial relief and assistance to those who adopt children who do not already have a parent.  For this reason, there is an exception rule that says that a taxpayer does not qualify for the credit if they are adopting the child of their spouse.  There’s that word again, only this time, it’s a good thing.   Because the word “spouse” is used, RDPs are eligible for the credit when adopting a partner’s child.  After all, we’ve been told time and again that partner’s are not spouses.  Period.  For once, the rigid federal definition of marriage provides a benefit to LGBT people instead of harming them.

The Adoption Credit has been around for some time, at least as far back as 1996 when Bill Clinton signed the Small Business Job Protection Act.  The credit was then created specifically to benefit those adopting special needs children.  Over the years, the character of the credit has changed as various provisions have been passed and have expired.  Perhaps the biggest moment in the history of the Adoption Credit was in 2010 when President Obama signed the landmark Affordable Care Act.  In addition to increasing the amount of the credit to roughly $13,000 per child, up from Clinton’s $5,000, the act also made the credit refundable.

Tax credits are either refundable or non-refundable and most are non-refundable.  The distinction is significant.  A non-refundable credit will reduce any tax owed to zero, but not below.  A refundable credit is one that will reduce your tax to zero and then refund you any excess.  So, if you have a $1,000 non-refundable credit and $800 tax owed, you end up with zero tax and zero refund.  If you have a $1,000 refundable credit and $800 tax owed, you will receive a $200 refund. 

Sadly, the refundable character of the credit is set to expire for the 2012 tax year.  As it stands now, if there are no changes, the credit will still be available for all 2012 adoptions but will be non-refundable.  In 2013 it may be non-refundable and only apply to special needs adoptions.  Although these attributes of the credit are scheduled to expire, President Obama has already once attempted to make changes.  Unfortunately, the attempt failed as it was wrapped up in his ardently defeated budget proposal.  The changes would have made the credit refundable for 2012/2013 and permanently available as non-refundable for all adoptions thereafter.  

What happens with the Adoption Credit for the 2012 tax year remains to be seen. I expect tax law changes through early 2013, as is typical. Still, if you are planning to adopt your partner’s child, 2012 may be the year to consider it.

Social Security Issues for Self-Employed Registered Domestic Partners in Washington

15 Wednesday Feb 2012

Posted by in Community Property, RDP Tax Returns, Social Security, Taxes, Washington

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The absence of federal marriage equality has a powerful impact on your social security. I briefly touched on this in a previous post, Washington to Legalize Same-Sex Marriage?. What I discussed there was in the context of survivor benefits which is unfortunately only one of the social security issues that “unmarried” couples face.

Let’s start with how you accumulate the benefits in the first place.  When you are an employee, your employer withholds social security taxes from your wages at the rate of 6.2%. Additionally, your employer makes a match of this withholding at their own expense. The amounts are reflected on your W2 and from here go toward your social security credits; in other words, this is where your social security benefits come from. These amounts, from wages, are not affected by the income-splitting rules for RDP taxpayers. Even though you will be combining and splitting your W2 wages for income tax purposes, the social security credits are still calculated from your employment records.

This is not the same for self-employed people. When you are self-employed, you report and pay your own social security tax, and since you employ yourself, you also have to pay the match. This means you are paying taxes on your earnings at 12.4% instead of 6.2%, a part of what is collectively known as self-employment tax. The tax is calculated on your return as a percentage of your net self-employment income (net profit). On a married filing joint return, self-employment income is linked to a social security number so that only the earner is credited for the social security. When spouses file separately in community property states, even though the self-employment income is split, the self-employment tax is only imposed upon the earner or owner of the business.

The same is not true for RDPs. The special rule allowing the self-employment income earner to receive full credit for the social security, so as to be comparable to how it works with wages, only applies to spouses.  Again, because of semantics, these protections do not extend to RDPs. Many tax preparers, including me, feel that the IRS’s position on this issue is incorrect.

There are consequences to this treatment of self-employment tax. Firstly, if both partners are working, it means that one partner is getting 100% credit for the social security attributable to their own wages and 50% of the social security attributable to their partner’s self-employment income. The self-employed partner is only getting 50% of their self-employment credits and 0% of their partner’s wage credits.  For many, this is a problem, but for some it could be a benefit.

If one partner is self-employed and the other is not working at all, this treatment allows the non-working partner to accumulate social security credits. This can be extremely important for some since, unlike spouses, a surviving partner is not eligible to receive the deceased partner’s unused benefits. It basically provides a loophole to funnel social security benefits to a non-working partner.

To me though, this potential benefit does not outweigh the potential drawbacks. As is the case with many problems arising from unequal federal rights, there is an issue of double taxation. Let me explain.  There is a wage base for social security tax. This means that once you exceed a certain wage level, the earnings above that level are no longer subject to social security tax. In 2012, that base is $110,100 and it applies to both wages and self-employment income. So, if a single or married person makes $150,000, only the first $110,100 is subject to the social security tax. What if you are an RDP in a community property state with $150,000 in self-employment income? The full $150,000 is taxable.   

An example: One partner has $200,000 in self-employment income. The rules require this to be split so that each partner reports, and is taxed on, $100,000. Both partner’s shares are now, in their entirety, subject to social security tax since the reportable amounts are both beneath the wage base. This means that social security tax is imposed on the whole $200,000 resulting in $11,148 more tax than a married or single person would have to pay. 

While it’s true that most RDP taxpayers are not bringing home over $110,100 in self-employment income, I find it extremely alarming that this sort of disparity in taxation is built into our current tax system. Of course, there are ways to get around this taxation issue. However, to do so would require consulting a financial or legal professional; just another example of the unnecessary burden the income splitting rules put on RDP taxpayers.

It’s Tax Time: What you Need to Know if you are a Registered Domestic Partner in the State of Washington

24 Tuesday Jan 2012

Posted by in Community Property, RDP Tax Returns, Taxes, Washington

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In 2010, the IRS made drastic changes to the filing requirements for Registered Domestic Partners (RDPs) in Washington State.  Didn’t know about these changes? You are not alone.  It was a scramble for many in 2011. Some learned of the changes just before the filing deadline, while others remained unaware until after they had filed their returns.  

During the 2010 tax year, the IRS began to acknowledge the community property rights granted to Washington RDPs under state law.  At first, a federal agency recognizing same-sex relationships sounded exciting.  It soon became clear however that the IRS is certainly not recognizing these relationships.  Rather, they are simply allocating and taxing income according to who Washington says it belongs to.  This is not to say that the new rules are a bad thing.  While they still fail to provide the same tax protections afforded spouses, the new rules are beneficial to many RDP taxpayers. The trouble is that they are confusing and burdensome to follow.

For spouses, who are able to file jointly, community property does not pose a problem.  Everything is combined onto one return so it doesn’t matter whose is whose.  For RDPs, who cannot file jointly, recognition of community property is a big problem.  In a community property state, the old adage “what’s mine is yours, what’s yours is mine” is true, and it applies to income.  The question then becomes how to report this income for tax purposes.

Let’s start from the beginning.  This is not the first time that taxpayers have been faced with this problem.  The community property concept dates back to early Germanic tribes, long before the advent of joint tax returns. Community tax reporting issues first arose in the 1930s when a man by the name of Seaborn, coincidentally from Washington, reported only half of his wages to the IRS.  Seaborn reasoned, and rightly so, that he should only have to pay tax on half of the income since, according to state law, only half of it was his. The IRS disagreed and assessed interest and penalties on his return. A series of legal battles then began and the US Supreme Court eventually ruled in Seaborn’s favor.  As a result, Congress amended the tax code and created joint tax returns.

Once spouses were able to combine income onto one return, the issue was largely forgotten. Then, seventy five years later, California became the first state to grant community property rights to same-sex couples and a similar tax reporting problem arose. The first arguments for RDP community property recognition began in 2005. When the IRS responded, one year later in 2006, they said that the precedence created by the Seaborn case only applied to spouses and that RDPs are not spouses as defined by the Defense of Marriage Act (DOMA).  After several court cases in the state of California, culminating in May of 2010, the IRS finally changed its position. Now, same-sex spouses in California, and by default RDPs in Washington and Nevada, are required to file according to community property rules.

Unfortunately, there is very little IRS instruction on how to follow these rules.  To date, the only guidance is an FAQ page and a publication that was originally written for spouses who are married filing separately. The IRS merely inserted “Or RDP/Same Sex Spouse in California” throughout the text of the publication and, thanks to DOMA, much of it is inapplicable as it is filled with explanations of rules that only apply to spouses.

Luckily, once you figure out how to file the return, and what numbers to put on it, the end result may be a larger refund. Those who benefit most are couples in which one partner is a significantly higher earner than the other, or those in which one partner does not work at all. In these situations, when the incomes are combined and split, because most income is community income, the income is taxed at a lower rate. For example, if one partner makes $100,000 and the other $0, and it is all community income, each partner will report $50,000. The tax rate is lower at $50,000 than it is at $100,000. This means that the entire $100,000 is taxed at a lower rate, resulting in less tax owed. In the example above, even a 2% drop in tax rate could mean a $2,000 savings.

Additionally, the IRS is allowing, but not requiring, taxpayers to amend prior year returns in order to apply the rules retroactively.  You may want to consider amending your 2009 and 2010 returns. If the new rules would have resulted in a larger refund in one of these years, amending may get you a check from the IRS, with interest.

The new rules can be complex and there are many issues I have neglected to go into here. I’ll be posting more entries discussing these issues in more detail, along with various methods of handling them. Until then, take solace in the confusion. Many believe that these uncertainties will lead to a new federal filing status option for Registered Domestic Partners. As unsatisfying and incomplete as the new rules are, they just may be a stepping stone to marriage equality.