IRS says California RDPs should split wages on tax returns
Posted June 11th, 2010 by adminThe IRS Chief Counsel’s Office has issued updated guidance, Chief Counsel Advice (CCA) 201021050, for reporting earned income of California registered domestic partners (RDPs).
According to the ruling, the federal government recognizes community property rights of California registered domestic partners effective January 1, 2007. Therefore, one-half of the earned income of a partner should be reported on each partner’s federal income tax return, unless the RDPs execute an agreement opting out of community property treatment.
Registered domestic partners still can’t file joint federal income tax returns.
This new reporting requirement should be followed for income tax returns filed after the ruling was issued on May 5, 2010. Taxpayers may optionally amend income tax returns filed for tax years 2007 through 2009 to follow the new ruling.
This ruling changes previous advice issued in CCA 200608038 on February 24, 2006. In the earlier ruling, the IRS said each RDP should report his or her own earned income, disregarding community property rights. The reason is on September 26, 2006, California enacted Senate Bill 1827, which repealed language in the California Domestic Partner Rights and Responsibilities Act of 2003 that said “earned income may not be treated as community property for state income tax purposes.”
This is a tremendous validation of community property rights for California same sex couples and other registered domestic partners, and could result in significant tax savings for some of them. On the other hand, the ruling adds an element of complexity for tax return preparers and the IRS because income reported on an information return, such as a Form W-2, under one person’s social security number will be reported on two income tax returns.
Tags: couple, domestic, gay, income, partners, RDP, registered, same, sex, Tax matters
7 Responses to “IRS says California RDPs should split wages on tax returns”
June 18th, 2010 at 7:25 pm
The IRS ruling is wrong.
I couldn’t disagree more with the premise of your article. The IRS ruling hurts domestic partners and does not help most of them.
It forces Domestic Partners to file their tax returns in a way that may not be beneficial to them.
Currently the IRS refuses to allow Domestic Partners to file as married. In all other relationship/business ownership cases the IRS uses State property and ownership laws for Federal income tax purposes. In California’s case that means the only legal entity the IRS recognizes for Domestic Partners is as partners in a partnership. Under California law partnerships do not have to be written, and income and expenses can be allocated by partners by agreement. Under this premise the IRS ruling is non-sense and should/will be overturned.
Some of the more than 100 harms that ALWAYS requiring splitting all the joint income in half will contribute to:
1) Low income parents will lose grants and scholarships based on their income for their children in college.
2) Income from dividends and interest cannot be allocated to the lower income partner resulting in higher taxes.
3) Expenses for the payment of the mortgage and property taxes cannot be allocated to the higher income partner who actually made the payments. In other words the IRS now is trying to say that Domestic Partners must file as single – yet refuses to allow them to take their mortgage interest deduction which they made 100%.
4) Self employed persons with spouses that get health coverage for them will have their health benefits taxed 100% on one partner’s Federal return and o% deductable on the other partners return. In other words the IRS wins both ways and the taxpayers lose both ways.
The IRS ruling is twisted and illogical. It only benefits Domestic Partnerships where one partner is rich and the other a stay at home partner. For over 90% of Domestic Partners it will hurt them. Note the 90% figure is my estimate based on over 30 years of income tax preparation.
My only hope is that the IRS having really messed up its rulings will have to recognize the marriages as marriages and put all this nonsense to rest.
Sorry but posting must be anonymous to protect me and my clients from IRS retaliation.
June 21st, 2010 at 11:59 am
Thank you for your comments.
Many of your comments also apply to married person filing separate returns and some to unmarried persons living together.
The “best” solution would probably be for the federal government to treat registered domestic partners the same as married persons and permit them to file joint income tax returns, like California does.
I don’t see the federal government recognizing same sex marriages for the forseeable future.
I sympathize with your frustration on behalf of your clients.
I will soon be interviewing Profession Patricia Cain about these developments, so I’ll share your comments with her.
July 7th, 2010 at 12:52 pm
We have several clients who are RDPs of CA, but file Nonresident CA tax returns.
Now, is the IRS saying that they can split their federal income in half or just the income reported on their CA income tax returns (which only represents 10% of their total earned income).
Thanks for your thoughts.
July 7th, 2010 at 4:37 pm
This is actually a legal question and I am not a lawyer. I suggest that you attend a continuing education class on California community property. A shortcut is to buy course materials from the CalCPA Education Foundation. Their telephone number is 800-922-5272. Their web site is educationfoundation.org. Course number is 4102138.
A big issue is whether your clients are still domiciled in California. Generally, property acquired during marriage while domiciled in California (other than property acquired by inheritance or gift or earnings from separate property) is community property. Based on the letter rulings, if the taxpayers are RDPs domiciled in California, all of their community property income is divided between their separate returns, even if the source isn’t in California for income tax reporting.
If your case is difficult, consider consulting with a California tax attorney or family law attorney for guidance.
March 4th, 2011 at 12:41 pm
Yes, it is ridiculous and thus far the advice is not to e-file because the IRS will not understand the return under the new income splitting rules so to send a letter attached to the return stating it is prepared under the new rules. It’s costing benefits that aren’t available elsewhere; I lose my VA benefits because of this income splitting and there’s no replacement. I can’t get on any state program for medical because I’m an RDP with a working partner. We used to do our own taxes and now have to employ someone (small as that may be) and there’s just do real tax savings. It’s just not fair and goes way beyond the two of us and is going to hurt people everywhere.
March 4th, 2011 at 3:18 pm
As with married couples with community property, the division will benefit some, and not others.
There is an alternative. You can make an agreement for the status of future earnings as separate property. Each of you will need a separate attorney. In the process, you are surrendering valuable community property rights.
“You can’t have your cake and eat it too.”
Be sure to watch my interviews with Professor Patricia Cain about income and estate tax problems of same sex couples. They will be broadcast on Comcast channel 15 in San Jose at 7 p.m. on March 16 and 23 and then posted under “past episodes” at http://www.financialinsiderweekly.com.
Professor Cain is a great resource in this area. Her blog address is http://law.scu.edu/blog/samesextax/.
May 12th, 2011 at 11:17 am
The IRS has issued updated Publication 555, Community Property, that you might find to be a useful reference. The IRS ruling doesn’t only apply to property of California RDPs located in California. The status of the property depends on the couple’s status as an RDP and where the couple is domiciled. Since your clients are filing as nonreisdents of California, it could be they have no community property despite being California RDPs. This is a legal issue for which you might want to consult with a California tax attorney. A useful resource in this area is the blog of Professor Patricia Cain at Santa Clara University, http://law.scu.edu/blog/samesextax/
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