Same-sex couples in three states could benefit from new rules from the IRS on reporting community income. Prior to this new guidance, same-sex couples simply reported their own income and their own deductions on their separate federal returns. Under the new IRS rules, community income and community deductions are divided equally between both spouse's federal income tax returns.
These new rules affect same-sex married couples and registered domestic partners in community property states that also allow same-sex marriage or civil unions. This is because only in these states are same-sex couples considered married and therefore considered to have community property. These states are:
Note that Nevada and Washington are 2 of the 7 states that do not have an income tax.
Could Increase, Decrease, or Not Affect Federal Tax Bill
For some couples this could mean a tax bill that is unchanged, while for others it could mean a higher tax bill. But for couples with a large disparity in income it could mean tax savings at the federal level.
For example, say that one spouse makes $200,000 a year and the other makes $30,000. Before community property rules applied to same-sex couples, the higher income spouse would have paid taxes on all $200,000 of income. Under these new rules, each spouse would pay taxes on $115,000 of income (half), which would bring the higher income spouse into a lower tax bracket and result in a lower overall tax burden for the couple.
Joint Federal Returns Still Disallowed
Same-sex couples are still not allowed to file joint federal returns, but many feel these new rules are a step closer to equality. Lambda Legal, a legal organization that advocates for gay rights, has said that, “The change is welcome progress towards our community’s goal of full legal equality for same-sex couples, even though it makes preparation of tax returns more complicated for many couples during this period of change.”
Although gay and lesbian married couples are still not allowed to file joint tax returns at the federal level, ten states allow gay couples to file jointly.
When Are the New Rules Effective?
These new rules go into effect for tax years after June 1, 2010. Since most individuals are calendar year filers, this will affect most people’s 2011 tax returns.
California applied community property rules to RDPs for state income tax purposes on January 1, 2007. Due to this, the IRS is allowing California RDPs to amend their federal tax returns, if they choose to, for calendar years 2007, 2008, and 2009.
It’s a good idea to consult with a CPA or Enrolled Agent to determine if it would be beneficial to amend your returns.
More information:
- Preparing your federal return using community property rules
- Allocating Community Income and Separate Income
- Allocating Community Deductions and Separate Deductions
- Allocating Tax Withholding and Estimated Payments