On May 28, 2010, the IRS issued new tax reporting guidelines for Registered Domestic Partners in California.

On May 28, 2010, the IRS issued new tax reporting guidelines for Registered Domestic Partners in California. In 2006, California lawmakers ruled that beginning January 1, 2007, earned income would be treated as community property for state income taxes for RDPs as well for married couples. This obligated registered partners to file a joint return (or RDP filing separately) for California, yet having to file separate individual federal returns in which the registered domestic partnership was not recognized.

As Federal tax regulations generally respect state community property laws, the 2007 California change provided a basis for the IRS to adjust its rules upon being challenged. To conform to the newer California community property laws, the IRS made three changes, per a non binding letter ruling:

• Each taxpayer report one half the joint income that would be reported on the joint California return
• Each taxpayer is entitled to half the credits and withholding from joint wages.
• Dividing income does not result in any transfer of property or gift tax issues for federal purposes.

For example: Pam and Kim are registered with the state of California as domestic partners. In 2010 Pam earns wages of $30,000 and Kim earns $70,000. On their federal tax returns, their filing status will be single, and each will have wages of $50,000. The total of the federal withholding will also be split equally, as would deductions and credits.

Likewise, if one partner's account is in collections for IRS debt, joint assets will be considered when establishing a reasonable payment plan.

For many RDP couples, this may result in a large tax advantage. Amended returns may be filed for 2007 onward but are not required.

*Please note: These new tax reporting rules will probably result in a non-alignment between informational returns such as W-2s and 1099s filed with the IRS by 3rd parties and the individual federal returns filed by each registered domestic partner. The preparation of the federal return has to be approached with caution to avoid inquiry and correspondence from the IRS.

For tax purposes, the State of California has recognized same sex couples that married between June 16, 2008 and before November 5, 2008 as married.

Such a couple will file as either the married/RDP filing jointly or married filing separately filing status.

2008 is the second year of the married/RDP status for same sex couples in California. The federal non-recognition of same sex marriages will result in more complexities than 2007.

Amounts carried forward from prior years such as passive loss carry forward on rentals, capital loss carry forwards and Net Operating loss carry forwards will also vary between federal and state. This adds a new and complex level of complications for the same sex couple.

Estimated taxes – For California purposes the tax-payers may either file a joint estimated payment or the couple may file estimated taxes using separate vouchers. Either method the taxpayers can use form 540ES or form DE 4 to adjust the withholdings of either or both taxpayers.

For the first time in 2009 as a response to the budgetary problems that the state is facing, the Franchise Tax Board is requiring estimated taxes of 30% on April 15th and 30% on June 15th.

Under SB 1827 Registered domestic Partners in California will have to file joint tax returns or file a return equivalent to married filing separate.

The new filing requirements became effective in the beginning of 2007. There is no doubt this legislation was introduced to benefit the Gay and Lesbian community. However the benefits would appear to be only symbolic. Federal legislation has not recognized these rights. This will add an additional level of complexity to the Gay and Lesbian tax return. Two federal tax returns need to be prepared and filed - one for each partner. In addition, and this is where matters become complicated, for California the domestic partners are treated equivalent in every way to a married couple as far as income tax compliance is concerned.

The couple therefore has choices for their California tax return. They can either file one tax return reporting both of their incomes and transactions on the same tax return. Or they can continue to file two separate tax returns, but will be obligated to file using the higher married filing separate tax rates. Under some circumstances, where there are dependants, a partner can choose the head of household filing status.

This will in most cases result in higher taxes than under the previous system. The total taxes paid by the domestic partners under this new approach will in most cases be higher than it was prior to the change.

In addition there is a level of fancy footwork necessary for preparation of this complicated tax return. Should the domestic partners use different tax preparers the California returns can be prepared only after the availability of each of the respective federal returns. The California Franchise tax Board is still grappling with many different questions and complications regarding the details of implementing this legislation which was designed and initiated to protect the LGBT community. There are a myriad of different detailed applications of non conformity with Federal tax law that has still to be addressed.

The initial filing date for this new situation will be April 15, 2008 but affects all transactions in 2007.

California state non-conformity with federal tax, compels a bifurcated approach to tax preparation. Careful analysis is warranted prior to registration as domestic partners, to review whether or not the other advantages of a registered domestic partnership such as health insurance benefits and other rights and obligations of a less financial nature, make it worthwhile to register. An alternative approach is to create these rights and obligations in other legal contractual ways. At Wiesenberg & Company we will guide you through these issues.