Guest Post: Community Property and Federal Tax Returns
[caption id="attachment_368" align="alignleft" width="112"] Boyce Hinman[/caption] Authored by Boyce Hinman, founder and director of the California Communities United Institute, and member of Marriage Equality USA. Hinman has been writing and posting a series, "Monday Morning Marriage Memo," as part of his Anatomy for Justice blog. This article was first published there, and is republished here with the author’s permission. Hinman resides in and serves California, therefore the posts sometimes have a California slant. NOTE: Marriage Equality USA is not a legal firm or a tax/accounting firm. No action should be taken based solely on the content of our news blog or website. The federal government requires that all same sex married couples either file joint federal income tax returns or file as married filing separately. This includes same-sex married couples. However, in 2010, the Internal Revenue Service (IRS) issued a ruling that affects the filing of federal income tax returns by registered domestic partners, as well. The key wording in that ruling is as follows: “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 from personal services or income from property, on his or her federal income tax returns.” Note: I am not an attorney or a qualified tax expert. No action should be taken based solely on the content of these memos. However, I hope the memos will help you ask the right questions of people who are qualified in these issues. The ruling says the income of California domestic partners must be split evenly because California is a so called “Community Property” state. Under California law income earned while a couple is in a registered domestic partnership is community property. All that income is owned by both of them regardless of who earned it. There is at least one exception to the requirement of splitting the household income on the federal tax return. That exception has to do with when the income was earned, or when the property was purchased. If, for example, one of the partners retired before entering the partnership, and that person is receiving a pension, then that pension income is separate property and does not need to be divided and half shown on each federal tax returns. Similarly, if one of the partners bought a rental property, prior to entering the domestic partnership, the rental income from that property is not community property. The income from that property should be reported only on the federal income tax return of the person who bought it prior to the domestic partnership. Sadly, the IRS staff does not seem to be informed of the ruling. Once we heard of the ruling Larry and I started dividing our community income in half and each reported half of it on our federal returns. Each year the IRS responded with a letter saying I had under reported my bank account interest income and so I owed more taxes than I had paid. However, the issue was that our joint savings accounts had only my Social Security number attached to them. Each year I cleared up the problem by sending them a copy of the IRS ruling, plus a copy of our registration as domestic partners. You can see, and download, a copy of the IRS ruling by clicking on the following link and then scrolling down to and clicking n the link at the bottom of the web based copy of this article. Here is the link to get you started. IRS Ruling These are complicated matters. Anyone wanting to act on this information should definitely consult an expert on income taxes before taking that action.