Same-sex couples in three states could benefit from using community property rules to allocate income and deductions on their federal tax return.
Effective for tax years after June 1, 2010, the IRS determined that state-level community property laws apply to registered domestic partners and persons in a civil union. Under community property rules, community income and community deductions are divided equally between both taxpayer'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 For Married CouplesUpdate: Same-sex couples are allowed to file joint federal returns following the Supreme Court decision in United States v. Windsor striking down section 3 of the Defense of Marriage Act as unconstitutional. If a couple is legally married on the last day of the year, they are considered to be married for the entire year for tax purposes. Married couples can either file jointly using the married filing jointly status or separately using the married filing separately status. If a married couple decides to file separately, and at least one of the spouses is a resident of California, Washington or Nevada, then each spouse will need to measure their income and deductions using their state's community property laws on their federal tax return.
Registered domestic partners and couples in a civil union, however, are not married and so will likely continue to file as unmarried on their federal return (for example, by using the single filing status). Community property laws apply to registered domestic partners just as they apply to married couples. So domestic partners in California, Washington and Nevada will need to measure their income and deductions using their state's community property laws on their individual tax returns.
California registered domestic partners are permitted to file jointly for their state tax return. Washington and Nevada does not have a state income tax.
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.
- 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