In 2010 there were major changes in the federal tax preparation guidelines for Registered Domestic Partners and Same-Sex Married Couples. This page answers some frequently asked questions on this topic based on today's available information. Please note that the IRS also issued Questions and Answers on this topic at the following website link - http://www.irs.gov/newsroom/article/0,,id=245869,00.html
Please note that this is an emerging topic and there is some disagreement regarding the IRS answers. The IRS guidance is not "authoritative" on this subject. Particularly if you are self-employed I recommend that you seek guidance from a competent tax professional to discuss the issues regarding the treatment of self-employment income under a community property scenario.
Also note that the determination of community property or separate property is a legal determination and it is a determination that could have legal consequences not only for federal income tax purposes but also for federal gift tax purposes, for disposition of assets on the dissolution of your relationship, and for disposition and taxation of assets upon your death. You should undertake this determination very seriously and you may need the help of an attorney to do so. I AM NOT AN ATTORNEY and none of the information here can be construed as valid legal advise: This is information of a general nature and should be taken as such. I would encourage you to seek legal counsel from an attorney specializing in this area.
Finally, according to Circular 230 I must say that any federal tax advice contined in this communication or anywhere on this website, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
No. The ruling does not recognize your relationship, per se, and you cannot file your returns as married. Your filing status remains either "single" or "head of household" (if you qualify to file as head of household). What the ruling does say is that for federal tax purposes your community property rights will now be recognized.
No, probably not. While President Obama's announcement is a wonderful step toward equality the announcement instructs governmental agencies, including the IRS, to still enforce DOMA until the Supreme Court rules on the issue, even though the Department of Justice believes DOMA to be unconstitutional. Therefore, the announcement does not directly alter how you can file your federal income tax return. You still probably cannot legally file a "married" federal income tax return as an original return without specific legal disclosures. However there have been a number of court cases that declare DOMA unconstitutional and if you would like to file a "married" federal income tax return based on those court cases you should discuss this possibility with your tax preparer and perhaps an attorney specializing in this area, who can explain the benefits and risks to you. You might also want to consider filing a PROTECTIVE CLAIM if you would save federal income tax by filing a "married" federal income tax return. This is a time limit on PROTECTIVE CLAIMS and you should discuss this option with your preparer immediately to gain the maximum benefit.
Some states are "community property states". When you enter into a legal intimate relationship "a community" in these states, the state may grant you community property rights. If your state grants you community property rights it means that whatever you earn from your own efforts (i.e. your W-2 wages or your self-employment income) while you are "in community" (i.e. after the date you became registered domestic partners or got married) automatically belongs equally to each partner of the community. So if I work and earn $100,000 and my wife does not work, we each own $50,000 of my $100,000 W-2 income. In the past the IRS ignored this fact and told me to report my $100,000 of W-2 income on my own federal tax return. Now, they recognize my community property rights and I report only $50,000 on my federal tax return. My partner/wife reports the other $50,000 on her federal tax return.
Many couples, particularly those in which there is a big difference between their incomes, will pay less federal income tax overall. In my example where one spouse works and makes $100,000 and the other spouse doesn't work at all, this couple could save more than $6,000 per year by being able to split the $100,000 of income between the two tax returns! Some couples save even more, I've had clients who save more than $20,000 per year in federal income taxes, one couple saved more than $34,000 for a single year. But not every couple will save, and some may even pay more federal tax. While it appears there are many more couples who will pay less tax than there are couples who will owe more tax, the effect on your own personal taxes will depend on the totality of your tax situation. Many factors matter: do you have children and who deducts them, have one or both of you claimed head of household status in the past, do you have a mortgage - who pays it, who claims the interest deduction - how high is the state income tax rate in the state where you live, do either of you have significant separate property income, do either of you qualify for tax credits, are either of you in Alternative Minimum Tax now, or will you go into Alternative Minimum Tax once your community property and deductions are split, and many, many more? It is nearly impossible to determine whether you will save tax but if your incomes are wildly different it is probably more likely that you will, although even then, not guaranteed.
Whether your interest income and your dividend income is "community property" or not depends on which state you live in. Some community property states like Louisiana say that any income you receive from any source while you are married is community property. But other states, like California, say it depends on whether you are earning interest on funds that were originally community property or not.
Yes, if in my prior example we took $10,000 out of my $100,000 W-2 income and we put it in a savings account and it earned $100 in interest, that $100 of interest is community property too, because the money that earned it, the $10,000, was community property. But if before I ever got married I had a savings account that had $10,000 in it and that is the only money in that account, and that account earned $100 of interest, then that $100 is not community property because the funds that earned it were not community property, they were my separate property.
Like your wages you also need to divide the rest of your income into community property and separate property. If the $100 of interest is community property then you will each report $50 on your federal tax returns. If the $100 is your separate property then you report all of it on your own tax return. So in my examples above, so far I have $50,000 of W-2 income to report, $50 of community property interest income to report and $100 of separate property interest income to report on my tax return.
No, the name on the account does not determine whether or not the account and the income are community property or separate property and it makes no difference whose social security number is on the form. What matters is whether the interest is from community property funds or separate property funds. Let me repeat because this is often confusing for people, IT GENERALLY DOES NOT MATTER WHOSE NAME IS ON THE ACCOUNT, NOR DOES IT MATTER WHOSE SOCIAL SECURITY NUMBER THE INTEREST IS REPORTED TO, WHAT MATTERS IS WHETHER THE FUNDS THAT ARE IN THE ACCOUNT, OR USED TO PAY THE EXPENSE, ARE COMMUNITY PROPERTY FUNDS OR SEPARATE PROPERTY FUNDS, OR, A COMBINATION OF BOTH THAT MAY NEED TO BE SPLIT INTO THEIR COMMUNITY PROPERTY AND SEPARATE PROPERTY ELEMENTS.
While technically the IRS is able to accept an efiled tax return, most tax software cannot calculate the correct tax and efile the return. Therefore, my tax clients will not have the option to efile their community property splitting tax return for 2011. The IRS requires that you attach a summary to your federal tax return that shows how you divided up the items of income and deduction that are community. Currently there is no way for you to attach this explanation to your efiled tax return and so you must paper file your returns and attach the appropriate summary. IRS Publication 555 contains an example of the required attachment. You can access a copy of Publication 555, which you should read before you meet with your tax advisor or before you complete your own 2011 tax returns here.
BUT PLEASE TAKE CAUTION WHEN READING PUBLICATION 555. ALTHOUGH IT WAS UPDATED BY THE IRS FOR THE NEW RULES IN DECEMBER, 2010 PARTS OF THE PUBLICATION CAN BE CONFUSING AND WE BELIEVE PARTS OF THE PUBLICATION ARE INCORRECT AND SHOULD BE CHANGED. WE ARE CURRENTLY IN COMMUNCATION WITH THE IRS IN THIS REGARD BUT DO NOT KNOW WHEN, OR IF, THE IRS WILL MAKE FURTHER REVISIONS TO PUB 555.
ALSO VARIOUS PORTIONS OF PUBLICATION 555 ONLY APPLY TO PARTNERS WHO ARE NO LONGER LIVING TOGETHER AND OTHER SECTIONS ONLY APPLY TO TAXPAYERS WHO FILE AS "MARRIED FILING SEPARTELY". YOU CANNOT FILE YOUR TAX RETURN AS "MARRIED FILING SEPARATELY" AND THESE RULES SHOULD NOT APPLY TO YOU. BE CERTAIN YOU READ THIS PUBLICATION CAREFULLY.
AND IN CERTAIN CIRCUMSTANCES EVEN WHEN YOU FOLLOW THE INSTRUCTIONS IN THE PUBLICATION YOU ARE LIKELY TO GET CORRESPONDENCE FROM THE IRS AFTER YOU FILE YOUR TAX RETURNS. WE ARE IN CONVERSATION WITH THE IRS TO TRY TO REDUCE THIS CORRESPONDENCE.
Yes, you can still request that your refund amount be directly deposited to your bank account, but you should be aware that it has typically been taking about four weeks for the paper filed tax returns to be processed by the IRS and for refunds to be issued.
Maybe and good luck.
No, the tax software that professional tax preparers use, in and of itself, does very little to help complete the tax returns, but the tax professionals should be able to manipulate the tax software program and produce an accurate tax return for you if they are savvy regarding these changes and the nuances of the new rules. It is extremely important that you have a tax preparer who is conversant with these issues.
Correct. For the next few years these tax returns will be complicated and expensive to complete, even for the tax professionals. My analogy is that it is a bit like rearranging a room or remodeling a house, we've knocked out a wall, and there is every hope that the new place will be better, but in the meantime, it's actually messier. These next few years will be challenging for you and the tax professionals who complete these returns. It is likely to be expensive if you hire a professional, our minimum fee for completing a community property splitting return is $1,000 per person. And you may need to file an extension in order to get your tax returns completed correctly.
Not at all, extensions are a normal part of business with the IRS. You still pay your taxes on time because the extension doesn't give you more time to pay your taxes if you owe tax, it just gives you more time to get the tax forms done correctly. This makes it easier for both you and the IRS because then you do not have to amend your returns later if you filed them incorrectly in the first place.
Don't panic if you've already filed your tax returns and did them incorrectly, the IRS will not show up at your door tomorrow. In fact, it will take a while before they will even be able to match up your tax returns to know whether you live in a state that grants you community property rights. If you've already filed your return and it's wrong then my best advise is to consult with a tax professional who can file an amended tax return for you (most likely after April 15th).
Amending prior year returns is NOT REQUIRED, but it is permitted for your 2007, 2008 and 2009 tax returns. If you would pay less federal income tax under the new community property splitting rules then you have the option of amending prior year returns. I have amended 2007, 2008 and 2009 returns for many, many couples who got additional tax refunds, some very large, like $16,000 - $20,000 per year for each of those three years! But not all couples will benefit that much, some may get $3,000 a year, some could actually owe more tax. Of course if you owe more tax you would not amend your returns. How much you save, or if you save, all depends on your particular tax situation. And completing these amended returns is expensive as well. Our fees for amended returns splitting community property start at $1,000 per person. NOTE: Most 2007 tax returns are now closed and cannot be amended. 2008 and 2009 tax returns are still open for amendment.
Yes, there is a deadline that is dependent on when you actually filed your original returns. But for many people the 2007 tax returns must be amended by April 15, 2011. The 2008 amended returns shouldn't be due until April 15, 2012 at the earliest, and the 2009 amended returns shouldn't be due until April 15, 2013 at the earliest.
Still have questions? Please contact us anytime! We look forward to hearing from you.
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If you wish to review a webcast of one of these seminars click here for the link.