Recent, although limited, guidance from the Internal Revenue Service (IRS) on Registered Domestic Partners, is a reminder of the need to understand how state law treats domestic partners and same-sex married couples. Consideration must be given to how the state defines the property rights of these couples and the filing differences between federal and state tax rules. Where differences exist, preparers need to determine how to report income and withholding amounts on Form 1040 in ways that minimize risk of generating notices for failure to report all items from Forms W-2 and 1099. In addition, consideration must be given to whether prior year returns should be amended.
In May 2010, the IRS issued PLR 201021048, CCA 201021049 and CCA 201021050. These rulings note that due to a state law change in California, Registered Domestic Partners (RDPs) should treat income that is community property income for state purposes, as such when they file their federal return.
Per CCA 201021050, "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." It goes on to state 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 CCA."
This statement about amending returns seems to imply that the requirement to report community income as such on the federal income tax return is not effective until 2011 tax returns. However, the "June 1, 2010" date seems to be incorrect because in May 2010 when the CCA was issued, 2010 returns could not be amended because they were not yet filed.
While the IRS has issued nothing to clarify the CCA date, it did provide the following statement in Publication 17 for 2010 returns (page 5): "A registered domestic partner in California, Nevada, or Washington must report half the combined community income earned by the individual and his or her domestic partner." A similar statement is included in the 2010 Form 1040 instructions (page 19).
IRS Publication 555, Community Property states that California same-sex married couples are treated similarly to California RDPs (page 2). This publication also states the years for which Nevada and Washington RDPs can treat income as community property.
Note: Because federal law does not treat same-sex married couples or RDPs as married, they may not file as MFJ or MFS for federal tax purposes. Preparers should stay apprised of any changes in this area given a February 2011 announcement by the U.S. Department of Justice about not pursuing enforcement of all parts of the Defense of Marriage Act ("Statement of the Attorney General on Litigation Involving the Defense of Marriage Act" (DOJ press release of 2/23/11)).
For the current filing season, in assisting same-sex couples and RDPs in California, Nevada and Washington, tax advisers need to:
- Determine the community income of the couple. IRS Publication 555, Community Property provides some guidance on this topic.
- Determine how best to report the community property income on the federal income tax forms for each partner that will limit the risk of receiving a notice from the IRS that income was omitted. For example, it may be advisable to report a taxpayer's entire W-2 amount on the wage line and then on the miscellaneous income line, make an adjustment that removes half of the taxpayer's W-2 income and adds in half of the partner's wage amount. Similar adjustments are needed for the tax withholding line as well. IRS Publication 555, Community Property includes worksheets for splitting community income.
- Determine whether amended returns for prior years are warranted. For some couples with uneven income amounts, there is likely a tax savings. But be aware that the amended returns will show a tax refund for one partner and a tax increase for the other. The return with the tax increase will also owe interest and penalty. It is not certain if the issuance of the CCAs in 2010 will justify reasonable cause for having late-payment or other penalties waived.
For same-sex married couples or RDPs in other states, tax advisers should check how the state treats the couple's property rights and income and whether federal tax filings are affected.
For all states, preparers should determine how same-sex married couples or RDPs are required to file for state income tax purposes. In addition, preparers may want to determine if there are any special rules for such couples for other types of state taxes, such as property taxes.
For additional guidance: