By Rachel Ochman
Peanuts creator Charles Schulz says love is sharing your popcorn. Sharing community-property income doesn’t have quite the same ring. But same-sex couples in California, Nevada and Washington will need to figure out how to share their nests and everything in them on their Form 1040s. All three states recognize domestic partnerships and, for 2010, will apply so-called community property laws to such couples. The system attributes income and property acquired during marriage equally to both partners, no matter who earned it. The IRS last year issued guidance recommending that same-sex couples in these states calculate their total community income and split it in half. Sound simple? It’s not.
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The caveats are as diverse and numerous as the filers themselves. Would splitting one self-employed partner’s income of $200,000 give his unemployed (thus non-earning) partner Social Security credits? Then, suddenly, the two incomes are less than the $106,800 FICA cap. So would the couple have to pay Social Security taxes twice? And how would retirement plans figure into community property? Stock options? Deductions? Credits? The stack of questions grows ever higher.
One of the most pressing questions is what qualifies as community property. “I’ve talked to a lot of tax-return preparers and even they have a huge number of unanswered questions,” says Patricia Cain, a law professor at Santa Clara Law, who specializes in taxation and estate planning for same-sex couples.
Publication 555, which explains how community-property rules apply to income tax reporting, instructs filers to split wage income 50-50 on line 7. But “[n]obody I know will report income that way,” says Cain. “If income is earned by one person and allocated to another, can that [second] person call it earned income?” she asks. Cain suspects the answer should be no. “The IRS will connect the wage income from your W-2 with your Social Security number” and see a discrepancy, she says. Cain suggests each partner write his or her own income on line 7 of Form 1040. Next, write half of the community-share figure on line 21, which asks filers to list “other income” by type and amount. She says to include your partner’s Social Security number to indicate that this figure is your share of the community income.
The new guidance even stumped TurboTax. The service announced that it “can’t provide a fully guided federal experience” given the intricacies of state community-property laws and individual legal agreements between couples when they became registered domestic partners or same-sex spouses. The company says it will provide human beings to help you file if TurboTax failed you on your federal return. That service, for which pricing and details haven’t yet been hammered out, will be available on April 21. That’s (not so conveniently) three days after the filing date, so those same-sex couples using TurboTax (and its human services) will have to file for an extension.
What’s more, local tax preparers are likely swamped amending returns, says Melissa Labant, a CPA on the tax staff at the American Institute for CPAs. The IRS issued guidance about community-property income in mid-2010. In California, same-sex couples have the option to amend returns back to 2007. Those returns must be amended before the three-year statue of limitations runs out this April (if the returns were originally filed on time). A tax preparer may need more time to handle this year’s return on top of the amended ones.
And none of this reflects any changes that could come into play after the President’s recent tango with the Defense of Marriage Act. When Obama said last month that the Justice Department would no longer uphold the constitutionality of the 1996 law, which bars recognition of same-sex marriages, the Executive Branch dove into a murky issue. Several questions have since floated to the surface, particularly now that tax season is upon us. Yet DOMA will remain on the books until Congress repeals the law or the Supreme Court rules it unconstitutional, experts say. Until then, the IRS likely won’t change the way same-sex couples file their federal returns.
Readers, what headaches emerge from same-sex couples filing as single on their federal returns? What are some benefits you’ve heard? Do you think DOMA will be overturned either by Congress or the Supreme Court in the near future?