Category Archives: Washington

How the U.S. Department of Education’s Decision to Recognize Same-Sex Parents Affects Your Ability to Pay for College

19 Sunday May 2013

Posted by in College Education, Financial Planning, Taxes, Washington

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In late April of this year the U.S. Department of Education announced that they will begin recognizing same-sex parent households in the Free Application for Federal Student Aid (FAFSA) application process. The application will still fail to include a same-sex or registered domestic partner marital status, but instead will use “unmarried parents living together.” The new forms will also use gender neutral language such as Parent 1 and Parent 2 instead of mother and father.

In some ways this feels like an accomplishment in recognition and equality, and it is; but, yet again, it is bitter-sweet. We can add this to the list of situations where DOMA’s existence requires an institution to create workarounds in order to function as intended.  Just as the IRS has had to do with certain tax returns, the Department of Education has had to modify its processes in order to acknowledge same-sex couple households without actually being able to recognize same-sex relationships.  Regardless, it is still progress towards equal rights, and, with those rights come responsibilities.

Beginning with the 2014-2015 FAFSA application cycle, income information from both parents will be collected.  In the past, students who have same-sex parents have only reported the income of one parent. Now that the income of both parents will be included, many students will suddenly find themselves eligible for less aid, and in some cases altogether ineligible.

Luckily, if you anticipate your child to be eligible for less funding than you originally planned for, there are other tools available to help you. Some of the most commonly used are the various tax advantaged college savings plans.  Generally, these plans allow for tax-free earnings on your contributions as well as tax-free withdrawals if funds are used for qualified education expenses.

There are two types of college savings plans; 529 Plans and Coverdell Education Savings Accounts.

529 Plans

529 plans are state sponsored plans. This means that the attributes of each 529 plan are unique; each state does it their own way.

Washington’s 529 plan, the Washington State Guaranteed Education Tuition (GET) Program is a pre-paid tuition plan.  This plan allows contributors to pay for tomorrow’s tuition at today’s price. In a climate where college education costs are rising dramatically, this plan becomes quite attractive.

Contributions to WA’s GET program are in the form of “unit” purchases.  One hundred units is equal to one year of resident undergraduate tuition at WA’s most expensive institutions, currently either UW or WSU.  The value of your units will always be the current value, meaning, if you buy 100 units in one year, and five years later the cost of tuition has risen, your 100 units are still worth one year of tuition at current prices.

Coverdell Education Savings Accounts (Coverdell ESAs)

Coverdell ESAs are tax favored savings accounts. The contributions are not deductible; however, the earnings are tax-free. Unlike 529 plans, Coverdell’s have contribution limits, both in amounts that can be contributed and in eligibility to contribute at all. Contributions to Coverdell’s are limited to $2,000 per student per year.[i]  One benefit the Coverdell offers that 529 plans do not is the ability to use the funds for K-12 education. The tax-free and penalty-free withdrawals are not limited to post-secondary education as they are with 529 plans.

In addition to college savings plans, the IRS offers various deductions and credits to taxpayers who are paying for higher education.  It is possible to receive benefit from financial aid, college savings plans and deductions/credits in the same year, but they are not independent of one another.  Coordinating your education benefits is a critical piece of college planning. For example, funds you have set aside in a savings plan may affect a student’s eligibility for aid. Or, a taxpayer may or may not be able to exclude scholarships from their income and claim an education credit in the same year. Education assistance benefits from an employer will also have an effect.

No matter what your personal situation is, and whether or not the Department of Education’s announcement affects you, maximizing your education benefits can make a significant difference in your ability to pay for college. Start planning now!

[i] This amount begins to phase out based on the contributor’s Modified Adjusted Gross Income.

LGBT Equality Cliff (Not) Averted: Highlights of 2012 LGBT Rights Accomplishments

08 Tuesday Jan 2013

Posted by in Law Suits, Legislation, Marriage, Washington

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Congress may have averted the fiscal cliff but I doubt they can curb the fall of anti-LGBT legislation. In 2012 we saw monumental achievements in equality. The momentum is still growing and I do not expect it to slow in 2013. Instead, we may see a Supreme Court rule DOMA unconstitutional. Such a decision would have countless and far-reaching positive consequences; I call this potential roll out of rights the LGBT Equality Cliff.

The progress in 2012 was seen across the board, not just legislatively. Television shows had unprecedented growth in LGBT characters, actors and athletes came out as LGBT and allies, and musicians and Fortune 500 companies came out in support of marriage equality. There are positive shifts everywhere. The way that Americans think about the LGBT community is changing. Here are some of the many, many, achievements of 2012.

State Marriage

  • Maine, Maryland and Washington legalize gay-marriage
  • Rhode Island begins recognizing marriages from other states
  • Minnesota rejects a constitutional amendment denying marriage equality
  • New Hampshire blocks repeal of same-sex marriage
  • 9th Circuit Court of Appeals rules California’s Prop 8 is unconstitutional

DOMA

  • Federal District Court for the Southern District of New York rules DOMA unconstitutional
  • 1st Circuit Court of Appeals rules DOMA unconstitutional
  • Supreme Court agrees to hear two cases challenging constitutionality of DOMA

Elected Officials

  • Tammy Baldwin is elected as first openly lesbian or gay US Senator
  • Kyrsten Sinema is elected to House of Representatives and becomes the first openly bisexual member of Congress
  • Number of state legislatures with no openly LGBT members drops from 17 to 10
  • Michael Fitzgerald becomes 4th openly gay federal judge, the 1st outside of New York
  • Mark Takano becomes first openly gay person of color in US Congress

Military

  • Tammy Smith becomes first openly gay active duty general in American history
  • Sgt. Erwynn Umali and his partner Will Behrens become the first gay couple to marry on a military base
  • Pentagon hosts first-ever LGBT Pride event

Transgender Rights

  • US Citizenship and Immigration Services announces that US will recognize valid marriages for immigration purposes regardless of a spouse’s subsequent gender transition
  • U.S. Equal Employment Opportunity Commission rules unanimously that employment bias based on transgender status is tantamount to discrimination based on sex, which violates the Civil Rights Act of 1964
  • Massachusetts passes transgender anti-discrimination bill
  • American Psychiatric Association removes “gender identity disorder” from the DSM-5[i]

Media

  • Nordstrom’s, JC Penny, Microsoft, Amazon, General Mills, Macy’s, Starbucks, Viacom, Boeing, and Google announce support for marriage equality
  • NAACP announces support for marriage equality
  • President Obama and Vice President Biden announce support for marriage equality; so do Jay Z, Brad Pitt, Jason Mraz, Morgan Freeman, and Bruce Springstein
  • Anderson Cooper, Wade Davis, Orlando Cruz, Frank Ocean, and Sally Ride come out
  • San Francisco 49ers become the first NFL team to join the “It Gets Better” campaign
  • Keelin Godsey becomes the first openly transgender Olympic contender

Other

  • First PTA specifically for LGBT students is created in Long Island NY
  • Department of Justice publishes final regulations creating national standards directly addressing LGBT needs in an attempt to eliminate sexual abuse in America’s prisons, jails and local detention facilitates

As great as this list is, there are still 2012 achievements not listed.  I can only imagine what 2013 will bring. We’ve already had one victory this year when the American Civil Liberties Union secured severance pay for those discharged from the military under Don’t Ask Don’t Tell.  

What to Watch For in 2013

  • January vote on gay marriage bill expected in Illinois
  • February vote on gay marriage bill expected in Rhode Island
  • Supreme Court will review two DOMA cases in March

Happy New Year everyone!

[i] Gender Dysphoria remains in the DSM.

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.

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.

Washington to Legalize Same-Sex Marriage?

29 Sunday Jan 2012

Posted by in Legislation, Marriage, Washington

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The State of Washington may be on its way to becoming the seventh state, in addition to Washington D.C, to legalize same-sex marriage.  In 2007 Washington legalized domestic partnerships, then, in 2009 it expanded the rights of registered domestic partners to include “everything but marriage” as the passing bill became known.  Now, in 2012, Governor Christine Gregoire has announced her support for legal same-sex marriage in Washington State.

Shortly after Gregoire’s announcement, House Bill 2516 and Senate Bill 6239 were introduced by Representative Jamie Pederson and Senator Ed Murray respectively. The legislation would allow for same-sex couples to apply for and receive marriage licenses in Washington. Also in the bills is an amendment providing religious officials an exemption from performing services for such marriages.  Interestingly, this amendment changes the language from:  “minister or priest of any religious denomination” to “minister or a priest, imam, rabbi, or similar official of any church or religious organization.” Perhaps my favorite part of the bill though is an added section that includes the term “gender neutral:”

Where necessary to implement the rights and responsibilities of spouses under the law, gender specific terms such as husband and wife used in any statute, rule or other law must be construed to be gender neutral and applicable to spouses of the same sex.”

Since January 23rd, when Senator Mary Margaret Haugen, the deciding vote, announced her support, the bills have been expected to pass both the House and the Senate.  Upon passage, opponents will begin soliciting signatures in an attempt to get a challenging referendum on the ballot for public vote.  To do so, they need only collect 120,577 signatures by July 6th.

This is reminiscent of what took place in 2009 when the “everything but marriage” bill was passed. Opponents collected the required number of signatures and placed Referendum 71 on the ballot. I recall my time working as co-coordinator of the Olympia chapter Approve Referendum 71 campaign and fear that some of the same confusion will occur.  Because of the wording of the referendum, the beginning of the campaign was dedicated almost entirely to explaining that voting in support of the referendum actually meant voting in support of the original “everything but marriage” bill.  The number of voters unaware that voting against the referendum, brought by opponents, was in fact siding with them was astonishing.

Last night, just as I sat down to write about this, I received a phone call from an Equal Rights Washington phone bank volunteer. His script began by notifying me that I had donated during the Referendum 71 campaign and that they were now looking for support for ERW’s campaign for marriage equality.  I soon found myself in a long and emotional conversation as I jabbered on about how I was, at the very moment, writing a blog about the bills and, also, about the tax work I now do with registered domestic partners. He told me of his partner of 14 years who passed 22 months ago.  He explained that he did not understand, until his partner’s death, the breadth of the impact of not having the very rights he was fighting for.  

His partner was a dedicated worker who refused to begin drawing social security and preferred instead to continue working. By the time he passed he had accumulated significant social security benefits. Because their relationship is not federally recognized, the surviving partner is ineligible for the same social security survivor benefits afforded spouses.  As a result of losing half of his household income, and not being eligible for the same federal benefits married couples receive, this ERW volunteer will likely lose his home.  It is these nuances of the law that have a tangible and often life-changing impact on the lives of people that do not have the right to marry.  Unfortunately, legalization of same-sex marriage in Washington State will have no immediate effect on such federal rights. We can only hope that with each state that passes similar legislation we will be one step closer to federal marriage equality.

If you do plan to marry in the State of Washington, there are some things to consider. For those who are already in a registered domestic partnership, your registration will not immediately and automatically turn into a marriage. Registered domestic partners will need to apply for a separate marriage license.  Once married, the partnership will be automatically dissolved. This will remain true until June 30th 2014 at which time, if you are in a registered domestic partnership and have not yet applied for a marriage license, your partnership will automatically be deemed a marriage. For legal purposes, the date of marriage will become the date of your domestic partnership registration.

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.