Changes in Federal Tax Regulations for Registered Domestic Partners

By Sandee Hill, The Financial Fitness Center

A “private letter ruling” issued in May 2010 by the Internal Revenue Service dramatically
changed the manner in which Registered Domestic Partners (RDP) in the states of
California, Nevada, and Washington or same-sex married couples in California file their
federal tax return. As a result, RDPs and same-sex married couples in California must
follow these new regulations for filing their Federal tax return. Here’s what you need to
know if you live in one of these states.

A “private letter ruling” is a written response from the IRS issued to a taxpayer in
response to a written inquiry by, in this case, a California taxpayer. This interpretation
by the IRS of the facts presented by a taxpayer then become applicable to that
taxpayer. However, others may also use that interpretation to request the same results.
Taxpayers in these three states have requested this same interpretation and the IRS is
apply the ruling to all who legally qualify.

Why only these three states? These rules apply to RDPs in Nevada, Washington, and
California in 2010 because these states have full community property rights as of 2010.
California RDPs attained these rights as of January 1, 2007. Nevada RDPs attained
them as of October 1, 2009, and Washington RDPs attained them as of June 12, 2008.

RDPs (and individuals in California who are married to an individual of the same sex)
are not married for federal tax purposes. They can use only the single filing status, or if
they qualify, the head of household filing status. Furthermore, “California gives
registered domestic partners the right to enter into agreements identical to premarital
agreements between prospective spouses, to modify or avoid the application of the
community property”. 1
Under Chief Counsel Advice (CCA) 201021050 (pdf, 3 pages), the IRS determined that
individuals who are registered domestic partners in the state of California will need to
follow the state's community property rules when reporting their income and deductions
for federal tax purposes. This is the IRS ruling that now also applies to Washington and
Nevada. This will mean each partner will report one-half of their total combined income
and one-half of their total combined deductions.

The IRS has published a comprehensive document on the community property law and
how it affects RDPs and same-sex married couples. How to report community property
for federal tax purposes is detailed in Publication 555, Community Property.

These rules took effect on June 1, 2010 and are effective for the 2010 tax return.
California registered domestic partners may amend previously filed returns to report
community property income and deductions going back to the year 2007.

1
Internal Revenue Service Department of the Treasury, Washington, DC 20224. Number: 201021048
Release Date: 5/28/2010 Index Number: 31.00-00, 61.00-00, 61.30-01, 2501.00-00.

2
Internal Revenue Service Department of the Treasury, Washington, DC 20224. Publication 555

Gay and lesbian married couples still cannot file a federal tax return using the married-
filing-jointly or married-filing-separately statuses, although nine states do permit gay
couples to file jointly. The states are Massachusetts, Vermont, Connecticut, Iowa, New
Hampshire, California, Oregon, District of Columbia, and New Jersey. See “10 States
Allow Same-Sex Couples to File Joint Returns” for details.

A comprehensive article, “The IRS Applies “Income-Splitting” to California’s Registered

Domestic Partners and Same-Sex Spouses (and Now RDPs in Washington and
Nevada, too!)” was written by Lambda Legal and provides extensive information. Click
here to read the full article.

According to Lambda, “This represents a step in the direction of treating same-sex

couples who have formalized their relationship under state law the same as married
different-sex couples. 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. In addition,
although the change likely will result in higher income taxes for some same-sex
couples, it is anticipated that many more couples will see a decrease in their income
taxes.” 3

Who Must File

• These rules apply to RDPs in Nevada, Washington, and California in 2010
because they have full community property rights in 2010. California RDPs
attained these rights as of January 1, 2007. Nevada RDPs attained them as of
October 1, 2009, and Washington RDPs attained them as of June 12, 2008.

• Please consult your state’s Community Property laws for specifics if you live in
one of these three states.
o California Tax Information for Registered Domestic Partners.
http://www.ftb.ca.gov/forms/2010/10_737.pdf
 o Washington Registered Domestic Partners rights page 9
http://dor.wa.gov/docs/reports/2008/summary_2008_tax_leg/2008-
legsummary.pdf
o Nevada Legislative Summary
http://www.leg.state.nv.us/75th2009/Bills/SB/SB283_R2.pdf

• On the Federal tax return for the years 2007, 2008, 2009, RDPs who reported
income without regard to the community property laws may file amended returns
to report half of the community income of the RDPs for the applicable periods,
but are not required to do so.
o Those who would benefit most would be RDPs whose income is high for
one partner and lower for the other.
o If one of the RDPs files an amended return to report half of the community
income, the other RDP must report the other half.
3
The IRS Applies “Income-Splitting” to California’s Registered Domestic Partners and Same-Sex
Spouses (and Now RDPs in Washington and Nevada, too!)” by Lambda Legal-------------
o It is important for RDPs to consult with a tax professional to determine
what deadlines might apply in their particular circumstances.
o The deadline to file an amendment to the 2007 Federal tax returns is April
15, 2011,

What this means for you:

• RDP taxpayers must combine their wages, self-employment and shared asset
income and split it 50-50, per community property laws. RDPs will then have to
report half of the combined income on each of their individual federal tax returns.

o Community Property is property that you, your spouse (or RDP/California

same-sex spouse), or both acquire during your marriage (or registered
domestic partnership/same-sex marriage in California) while you lived in a
community property state. And property that you and your spouse (or
RDP/California same-sex spouse) agreed to convert from separate to
community property. 2

• Each taxpayer will be entitled to split the income tax withholding from the wages
or from the quarterly estimated payments made by each Taxpayer and Domestic
Partner.
o Community income is income from:
ƒ Community property.
ƒ Salaries, wages, or pay for services of you, your spouse (or
RDP/California same-sex spouse), or both during your marriage (or
registered domestic partnership/same-sex marriage in California).
ƒ Real estate that is treated as community property under the laws of
the state where the property is located.
o Separate income is:
ƒ Property that either person owned separately before the marriage
or domestic partnership.
ƒ Money earned while living in a non-community property state.
ƒ Property either received as a gift or inheritance.
ƒ Property, or part of property, bought with non-community funds.
 • Income derived from assets held outside the marriage – i.e. inheritance or
assets acquired prior to the marriage or with separately held money – will be
reported solely by the taxpayer who holds those assets as they are not
community property.

• If one of the RDPs files an amended return to report half of the community
income, the other RDP must report the other half.

Conclusions

At present, California, Nevada and Washington are the only states that recognize same-
sex relationships comprehensively under state law and have community property, which
applies to same-sex and different-sex couples alike once that relationship is recognized
under state law. So, same-sex couples in states other than California, Nevada, or
Washington appear to be unaffected by these recent IRS tax regulations.

Whether and how the new IRS position is likely to apply to other community property
states (Arizona, Idaho, Louisiana, New Mexico, Texas, or Wisconsin) will depend on
how the state itself applies its community property laws to same-sex couples. The
application of these new IRS tax laws on states that may enact RDPs and same-sex
married couples legislation will differ from state to state. Therefore, at this time, it is
difficult to know how the Federal tax laws will apply.

For now, those RDPs and same-sex married couples living in the states of California,
Nevada, or Washington must follow the new IRS regulation on Federal tax returns. If at
all possible, it is best to consult a tax professional in your state that is familiar with these
IRS changes. The Financial Fitness Center in Oakland, California is an RDP tax
specialist and can also help you with filing amendments to your 2007, 2008, or 2009
Federal tax returns. See our websites: http://www.rdptaxspecialists.com/ or
http://www.financialfitnesscenter.com/new/finfit/ .

Key Resources:
• IRS Publication 555 Community Property:
http://www.irs.gov/publications/p555/index.html
• Lambda Legal. “The IRS Applies “Income-Splitting” to California’s Registered
Domestic Partners and Same-Sex Spouses (and Now RDPs in Washington and
Nevada, too!)” http://data.lambdalegal.org/publications/downloads/fs_the-irs-
applies-income-splitting-community-property.pdf
• Pillsbury Law. “Advisory - Recent IRS Rulings Clarify Tax Treatment of
Registered Domestic Partners”
http://www.pillsburylaw.com/index.cfm?pageid=34&itemid=39698