The IRS has made major changes to how Registered Domestic Partners (RDP) or legal same sex married couples (SSMC) from California, Nevada, and Washington must file their 2010 taxes. In May 2010 the IRS announced that while they would not recognize SSMC or RDP relationship, they would recognize the community property rights that individual states grant SSMC/RDP's. The only states with community property laws and SSCM/RDP's are California, Nevada, and Washington. The May 2010 announcement was that this change would be voluntary for 2010, but in late October 2010 they announced that this change would be mandatory for 2010.
While this change is probably good for the LGBT community in the long run, and will likely lower most couples federal tax, for the short term the IRS has created a huge mess that will likely result in thousands of taxpayers incorrectly filing their taxes and receiving substantial penalties.
I am not a lawyer or CPA or even an accountant, but I would like to share my story on how this is making it super difficult for my partner and I to file our 2010 taxes.
My partner of 25 years and I were legally married in California in the short window between the California Supreme Court legalizing SS marriage and the passage of Prop 8. It was a bit of an anti-climactic event as our relationship has always been defined between each other, not by a marriage certificate. But as most here know, the certificate grants many benefits and responsibilities, and in those terms is very important.
I am the numbers guy in our partnership, so I always did both of our taxes. Our taxes are not too difficult, all my income has been from salary and my partner owns a small hair salon in town. I have always been able to use the tax software like turbo-tax to do our taxes. After marriage, the tax software required that we calculate our federal taxes as single persons, then it instructs SSMC/RDP's to save that file and create a duplicate federal return married filing jointly or married filing separate that is not filed but is used to calculate the state taxes. See the feds require us to file as single, but the state requires us to file married. So in past years we filed as single for federal and married filing separately for state taxes. It was an extra step that I whined about, but compared to this year no big deal.
About 2 weeks ago I stumbled across an article about the changes for SSMC/RDP's in the community property states. The more I read, the more I realized that this change in IRS policy was going to make our taxes, and the taxes of most SSMC/RDP's in community property states very, very complicated. The article I found suggested that all SSMC/RDP's in these states consult with a tax professional that specializes in taxes for SSMC/RDP's. I found quite a few CPA's with this specialty and started to call them to find someone to do our taxes for us. They all laughed at me, telling me that I was way late for this tax year; I would have to figure it out on my own. Filing for an extension is not much help, as you must pay all taxes due when filing for an extension or you are subject to the same penalties as if you just did not file. These changes are so major that even estimating tax due is not easy and dependent on how one interprets the IRS policy.
So I decided that I would give it my best effort to educate myself and try and do our own taxes. The only guidance from the IRS I could find was IRS Publication 555. After reading that document at least 20 times I started to get some idea of what we had to do. Essentially, the first step is to determine what income and deductions are from community property and what is from separate property. As I understand it community property is anything that you acquire while SSMC/RDP's, and separate income is from any asset that you had before the marriage/RDP event. Community property income includes all wages, business income and such. All community property income is split and half of the income is reported on each partners return. All deductions from community property like a home mortgage interest that was purchased during the marriage/RDP are also split 50/50. The taxpayer is supposed to create a worksheet that is attached to the top of each return showing how each item was split. This did not seem that complicated to me at first as we have only community property, no separate property.
Then I started to see some gray areas that I needed answers to. My partner has to pay self-employment tax on his profits from his salon. Should the self-employment tax be split like the income from the buisness is split? I had half dozen questions like this and thought I could just call the IRS and get them to answer the questions. To make a long story shorter, I have made over 15 calls to the IRS and the IRS advocate’s office to try and get my questions answered. I have been put on hold for many hours while they research my questions and have yet to get all my questions answered. One of my questions was how does the self-employment tax get allocated, split or on my partners 1040? I have called twice with that question and both times the agent told me that it is not to be split, 100% on my partners return. But my interpretation of Publication 555 is that it should be split and I also found an audio file on the Lambda Legal website that says it is to be split. This one issue will change how much I owe verses my partner by thousands of dollars, so I need an answer and I am at the end of my ropes.
So as I hope you can see, this is a big mess for me and many others. I purchased H&R Block's tax software just to use it to calculate the Schedule C stuff for my partner’s business. If I had not seen the article on this tax law change I would have used this software and it would have never told me about this change and let me file my return completely incorrect. I am guessing that thousands of other SSMC/RDP's are going to make that mistake. Even if I could have found a tax preparer willing to do our taxes, the fee is much higher than typical couples due to this huge complexity. One CPA I talked to told me that the minimum fee to prepare a SSMC return is $1,800.
I think the IRS blew it by making this change mandatory so quickly. But like I said in the long term it is probably a good thing and will lower the federal taxes for most SSMC/RDP's. I am hoping that others will share their perspective in the comments and I would appreciate any ideas on how I can get my questions answered before April 18th.