Unless you are a CPA, the very thought of filing federal and California tax returns can cause an anxiety spike. The stress is compounded for those who face complex tax scenarios, such as same-sex couples for whom federal and California laws are in conflict regarding the definitions of marriage, civil unions, and domestic partnerships. The resulting tax implications are not only unequal to what heterosexual married couples pay, but they are also confusing to apply. As we wait for the United States Supreme Court to hear arguments challenging the constitutionality of the 1996 Defense of Marriage Act (DOMA), same-sex couples should be careful in preparing their tax returns in order to avoid audits, potential penalties, and overpaying their taxes.
The good news for Californians is that for couples who were legally married in 2008, prior to Proposition 8, or who have become registered domestic partners, the state tax treatment is the same as for heterosexual married couples. Taxpayers simply combine all income, deductions, and credits on the same California Form 540 tax return. This year’s anticipated Supreme Court decision on Proposition 8 will not affect California tax treatment one way or the other because couples already are permitted to file jointly if they are either married or registered domestic partners.
By contrast, the Internal Revenue Service (IRS) currently requires same-sex couples to file separate federal returns as single taxpayers. This becomes a complex process because the federal government recognizes California community property laws, but not California’s recognition of same-sex unions. IRS Publication 555 (Dec. 2010) provides information on the application of community property for registered domestic partners, an arrangement which can include same or oppositesex couples who are not married according to the federal definition. For federal tax purposes, “community property” is defined as assets acquired or income earned after the inception of the domestic partnership. If the couple has a joint account and they pay all their expenses from this account, all expenses/deductions will be considered community. “Separate property” is defined as assets acquired prior to the inception of the partnership and any income/activity generated from said assets.
All of the couple’s community property—their combined income and any related tax www.ocbar.org February 2013 33 Creating these schedules requires significant additional preparation time and expense that most other married taxpayers do not incur. withholding, deductions, and credits, including child and dependent care credits—must be split between the two federal Form 1040 returns. The returns must be filed with supporting spreadsheets that show the details of how the various elements are divided. Creating these schedules requires significant additional preparation time and expense that most other married taxpayers do not incur. Due to these additional schedules, the separate federal tax returns cannot be filed electronically, but must be prepared in paper form and mailed, requiring IRS employees to manually process the returns, which increases the chances of processing mistakes and IRS inquiry. If a same-sex couple does not precisely prepare the detailed schedules, the likelihood of receiving correspondence from the IRS is high. Read the rest of this entry »