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Redefining “Yours, Mine and Ours”

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?


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    • Unfortunately what Cain is suggesting will increase AGI by whatever half your partners income is. If you claim all of your income and half of your spouses that too is a poor plan. I spent hours on the phone with the IRS yesterday and they said you must attach the allocation worksheet provided in publication 555. If they want to know how many of us there are they should have just included “gay” in the census.

    • i really thought the irs and the state franchise tax board do not communicate with one another …

    • After filing our joint return in California, we mailed a copy of our joint California return with a copy of our Pro Rata federal retun signed by both of us with a copy of our our W-2 attached to the back and California Registered Domestic Partners wirtten on top of form 1040. In the same envelope we mailed our single retuns with a copies of w-2 attached to back of each individual return, also a sheet with the division of income and deductions based on the Publication 555. We have each been able to view on the “where’s my refund” page our individual amouts of return under our indiviual socials, processing and expected return date. We used turbotax to efile our joint CA return and have recieved our refund. Turbo tax downloaded to do each individual print and mailed, it was a little complicated but can be done. So far so good. Lets see what happens.

    • Turbo Tax screwed up. I waited weeks for promised guidance and have received none other than “fill out this worksheet.” Assuming that the IRS wouldn’t make the ruling mandatory for 2010 is no excuse to not have these items complete after promising (months ago, since December) that they would be ready for same sex couples. Beyond the stress of being denied a service that I paid for, I’m also being held back from receiving my refund this year.

      I’m sure many couples will be flagged by the IRS even when using the standard deduction now since they haven’t been clear on what do to. Thanks, Turbo Tax.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.