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California Gay Couples Must Divide Community Income on Federal Returns

How to prepare separate returns using community property rules

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Update Note: We are waiting for forthcoming guidance from the Internal Revenue Service regarding the impact of the Supreme Court decision in United States v. Windsor on California registered domestic partners. What's known so far is that California gay couples, if they are legally married, are allowed to file joint tax returns (using the married filing jointly status) or two separate returns (using the married filing separately status). If a same-sex married couple in California files separately, each spouse will need to report their income and deductions using California's community property laws. It is highly probable that California registered domestic partners, however, will not be able to file their federal tax return jointly, as registered domestic partners are not married. It is likely that registered domestic partners will continue to file tax returns as unmarried (using the single filing status, for example). Additionally, it is likely that registered domestic partners will continue to report their income and deductions using California's community property laws. Further guidance is expected from the Internal Revenue Service in the near future to address these issues. This article will be updated once the further guidance is released.

The rest of the article discusses the general community property rules that apply to California married couples who choose to file separately and to California registered domestic partners who must file separately for their federal taxes.

Some California couples could see major changes to their federal returns because of new IRS rules for couples in community property states. Under the new rules, same-sex married/civil union couples in 3 states must split their community income and community deductions evenly between both of their federal tax returns. This rule also applies to different-sex married couples who use the married filing separately status as well as different-sex registered domestic partners (RDPs) domiciled in any of the community property states.

Still No Joint Federal Returns

Same-sex couples are still not allowed to file joint federal returns. However, gay and lesbian married couples can file joint returns in 10 states.  

Different-sex RDPs are also not allowed to file joint federal tax returns.  Different-sex RDPs, same-sex RDPs, and same-sex married couples must file as single or head of household (HOH) for federal purposes.  

What is Community Income?

Under these new IRS rules, the state’s definition of community income determine how that income is reported on both spouse’s federal tax returns. Anything that is deemed community income by the state, is split evenly between both spouse’s/RDP’s separate federal income tax returns. In California, “community income” generally is:

  • Salaries, wages, or pay for services that either spouse or RDP received during the marriage or registered domestic partnership while the couple was living in California.
  • Income from community property. Community property is any property that either spouse or RDP purchased with community funds during the marriage/civil union while living in California (or another community property state).

What is Separate Income?

Separate income is not split evenly.  It is reported by the spouse who earned the income.  

Under California law, separate income includes:

  • Income from separate property that either spouse or RDP owned before the marriage or domestic partnership.
  • Money earned while living in a non-community property state. For same-sex couples there are only 3 community property states because these states are community property states that also recognize same-sex couples as married and therefore having community property. Those 3 states are California, Nevada, and Washington.
  • Income from property either spouse or RDP received as a gift or inheritance during the marriage or domestic partnership.
  • Income from property bought with separate funds during the marriage or domestic partnership.

Some other specific types of income are considered separate income automatically by the IRS. They are:

  • Income from individual IRAs and IRA-based plans such as SEP-IRAs and SIMPLE-IRAs.  Income from these retirement accounts is allocated to the spouse who owns the account.
  • Social Security benefits are separate income that is reported on the return of the spouse who receives the benefits.
  • According to IRS Publication 555, income from 401(k) plans, 403(b) plans, and other types of pensions could be separate income, community income, or both.  The characterization of distributions from these accounts depends on whether the couple was married during the periods of participation in the pension and whether the couple was domiciled in a community property state.  

Self-Employment Income: Community or Separate?

Self-employment income is generally considered community income that is split evenly between the two spouse's federal tax return.  However, if only one spouse owns the business, only that spouse pays the self-employment taxes on their federal return. These self-employment taxes are based upon the full amount of self-employment income. 

There is also a deduction allowed for half of self-employment taxes paid.  This deduction would be a separate deduction only available to the spouse who owns the business and pays the self-employment taxes.

Will These Rules Affect My Exemptions?

Generally, each spouse would take their own exemptions on their own return.  Exemptions are not split evenly.  If the couple has dependents, they can decide who will take the exemptions for those dependents.  Usually these rules will not affect exemptions, except for in one specific situation.

When there is a large disparity in incomes, one spouse/RDP may be able to take the other spouse as a dependent on their tax return using the head of household status. In this situation, these new community property reporting rules could affect exemptions.  Because these rules require couples to split community income, the amount of income the dependent spouse has to claim could increase substantially.  This could in turn make the higher earning spouse unable to take them as a dependent.

See more about head of household status and qualifying relative dependents

Continue to page 2 for more information about deductions...

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