The IRS has released a Memorandum (PDF) from the Office of Chief Counsel changing its position on the tax treatment of registered domestic partners in California. It appears that the Memorandum’s conclusion will reduce the federal income tax for many of those couples, not only for the current year and future years, but also for years going back to 2007 for those who choose to amend past returns. The Memorandum raises a number of questions, however, and we’re awaiting clarification from the IRS on these issues.
The general rule in community property states is that income earned by either spouse is split between them for income tax reporting purposes. The rule doesn’t affect the overall income reported on a joint return, but becomes important when spouses file separately. The IRS had previously taken the position that the rule doesn’t apply to California registered domestic partners, but the new Memorandum says that a change in the California law extended “full community property treatment” to registered domestic partners as of 2007 and concludes:
“Consequently, for tax years beginning after December 31, 2006 a California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return.”
The Memorandum also states that for tax years beginning before June 1, 2010, registered domestic partners may, but are not required to, amend their returns to report income in accordance with this conclusion.
Implications
This new approach will produce tax savings for many couples, especially where one partner has much higher income than the other. In some situations it will produce a higher overall tax for the couple, but savings are likely to be far more common.
It appears that the ruling will not generally affect the filing status of registered domestic partners. They are not recognized as married for federal income tax purposes (nor would they be in states that permit same-sex marriage) so they cannot use the status married filing jointly, nor would they be married filing separately. Instead, they will continue to file as single taxpayers or in some cases heads of household. Some couples will pay a total tax that is less than if they were treated as married filing jointly.
Questions
We’re seeking clarification from the IRS on a number of issues, including these:
- Some community property states other than California have domestic partner or civil union laws. Will the same approach apply to people in those states?
- The Memorandum says people who have already filed under the earlier approach are permitted but not required to amend. Is this choice available also to people who have not yet filed for the years in question? This issue affects tax year 2010 and, for people who are filing on extension, tax year 2009.
- How does it work when people are permitted but not required to amend? Suppose one partner had $100,000 of income and the other had $0. The one with $100,000 chooses to amend (reducing income to $50,000 and getting a refund) and the other chooses not to amend because this would mean reporting $50,000 of income and paying tax. Will the IRS prevent this result? If so, how?
We’ll post again as soon as we hear from the IRS on these issues.
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