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Tuesday, March 8, 2011

Federal Income Tax and Same-Sex Married Couples and RDPs

In 2010, the IRS issued new, but informal, guidance on how Registered Domestic Partners in California, Nevada and Washington, and same-sex couples in California, are to report their income and wage withholding on their federal income tax returns. Basically, the IRS is saying it will follow state law that treats these couples as having community property income. Thus, for example, a California couple who are RDPs with each having wage income, will report half of each partner's wages and withholding on their single (or head of household) federal return. While that sounds easy, it is not entirely because:
  • The IRS computers will expect to see a match between one's W-2 and what is on his/her Form 1040. So consideration should be given to how to report this on each partner's 1040.
  • What is community property and what is separate property?

I have a short article in an AICPA Tax Alert released today that notes the IRS guidance, considerations of amending prior year returns, and has links to more guidance from the IRS and state tax agencies.

Hopefully any tax reform actions Congress and President Obama take in the near future will address filing status for RDPs and same-sex married couples. For the same reasons that different-sex married couples can file a joint return - and have joint liability and often pay a marriage penalty, RDPs and same-sex married couples should be treated the same given similar legal obligations of the relationship. As recently pointed out in a Wall Street Journal article (Laura Saunders 2/19/11), there is likely a revenue gain to allowing RDPs and same-sex married couples to file jointly at the federal level (because many would be subject to the marriage penalty - where the tax liability of the married couple exceeds what it would be if each person filed as single). Other tax issues also exist in all of this too, including the tax treatment of employer-provided health insurance that covers a domestic partner, and estate and gift tax issues.

It is time to modernize the federal tax system to treat all legally connected couples similarly. This will also bring equity and simplification because all will be treated similarly and rules intended to apply to "married" will truly apply to all who are married or an RDP.

1 comment:

Peter Reilly said...

Married couples who might benefit from DOMA being unconstitutional need to get amended returns in for 2007 before statute expires. In some circumstances joint returns can produce big benefits - e.g. one spouse might have capital losses and the other gains.