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Tax season often delivers more than the usual set of headaches for same-sex couples. But it’s about to get incredibly more complicated for couples living in
Here’s what’s happening: Same-sex couples who are living in the three states that have both community property laws and recognize registered domestic partnerships or same-sex marriage must now follow their state’s community property laws on their federal tax returns (if they’re officially partnered). In community property states, generally all income and property acquired during a partnership or marriage is treated as equally owned by both individuals.
So that means couples must add up their combined ”community income,” split it in half, and each report their half on their own federal returns (as well as any separate income). Before the
The new rule is likely to generate nice refunds for couples who have one high earner and a lower earner, and particularly couples in which one partner is a stay-at-home parent with no income. In those instances, splitting their income means they’ll fall into a lower tax bracket. In fact, most couples will benefit or break even, said
”I call this the income tax gravy train,” Ms. Stogdill said. ”It couldn’t really get better for the community as a whole.”
Consider a couple where one partner earns about
Heterosexual married couples in these states usually file joint returns, which doesn’t provide an opportunity to split their income and qualify for a lower tax bracket, Ms. Stogdill added. In this instance, the I.R.S. is simply recognizing gay couples’ community property rights, not their union.
But the new rules won’t help all gay families – couples who earn similar incomes will generally owe the same taxes and some people who now qualify for tax credits may end up paying more.
Regardless of how it affects you, figuring out the new system will be a challenge for the very same reason many couples will benefit: same-sex couples can’t file their returns jointly, which means couples with combined finances will need to untangle what is deemed community property and what is separate.
”Taxpayers in this position must either be extremely knowledgeable about taxes or pay high fees to tax preparation experts to jump through the right hoops,” she said. ”These rules place an unreasonable burden on taxpayers, and they need to be fixed.”
Indeed, getting professional help can be costly. Ms. Stogdill, for instance, charges each partner
Below, we compiled some tips for same-sex couples in the three affected states:
Figure out the state of your union. You will be subject to the new rules if you have a registered domestic partnership in
Figure out what’s community property. Same-sex couples already must follow community property rules at the state level, but that’s easier since they can file jointly and don’t have to differentiate between what’s community and what’s separate. But on their federal returns – where they must file as single or head of household – they will need to determine which is community property and which is separate. That is difficult because there isn’t a special form to do so. Instead, couples will have to attach a spreadsheet to their return, using the guidance offered in I.R.S. Publication 555, which provides information on what qualifies as community property and income. Still, experts said there were many open questions on what qualified.
Generally speaking, community property and income need to have been acquired or earned during your partnership. So any interest income earned from, say, a certificate of deposit bought with community income must be split in half. The same logic applies to deductions (if the mortgage is paid with community income, then both partners must split the mortgage interest deduction). To do all of this, couples will need to go back and trace what’s been acquired with community money – dating back to your date of registration or marriage, whatever is earlier – and what hasn’t.
”The tricky part will be figuring out what is your separate property from before and what was added after,”
Couples with valid prenuptial agreements, however, should follow the rules outlined in that document. It might say that a certain percentage of wages will remain separate, for instance.
Are you self-employed? Self-employed people are going to run into some unique challenges. Since these individuals typically prepay their estimated tax each quarter, all of the tax payments will be made by one partner, yet the other partner will be required to report half of the income. The result? One partner will end up with a big refund, while the other partner will have a giant tax bill, Ms. Stogdill said. ”We really need the I.R.S. to view these tax returns as related,” she added. ”That is creating all sorts of correspondence with the I.R.S. and it’s generating penalty letters that don’t make any sense.”
She recommends writing back to the I.R.S. explaining your circumstances. And in many cases, it may help to get an expert’s help.
Consider filing an extension. If you think it’s going to take more time to file your taxes correctly, experts said couples should not be afraid to file an extension using
”If we had the option of filing jointly, it would be so much easier to comply with the federal income tax law,” Ms. Stogdill said. ” On the other hand, many of us are getting a much better deal now.”
Consider amending previous returns. Couples have the option of amending previous tax returns, which makes sense for families who expect refunds. In
Getting help. Even people with relatively straightforward situations – perhaps where both partners collect a paycheck from an employer – might want to get a professional’s help, or at least attend a seminar or listen to a webcast offered by professionals with expertise in these issues. Several gay and lesbian organizations are also publishing their own guidance.
But even well-regarded tax programs like TurboTax are recommending that gay couples seek professional help, at least for the first year. (The TurboTax software is up to date with the new rules, but it is not equipped to provide the detailed hand-holding that users are used to).
”This is a very complicated area in taxes and there are currently several interpretations” to the new rules, said
Here’s hoping your refund isn’t wiped out by the cost of receiving it.
If you’re in this situation, please share some of the major questions that arose when filling out your return.
This is a more complete version of the story than the one that appeared in print.