Toward tax equality
New IRS decision will impact same-sex partners’ tax bills
It took the Internal Revenue Service to bring down Al Capone after other law enforcement had been unable to do so. Will it be the IRS that finally brings down DOMA, the Defense of Marriage Act?
Local CPA and tax practitioner Guy Crouch told SN&R that’s not a far-fetched possibility. A recent administrative decision by the IRS Office of Chief Counsel will have a profound effect on thousands of California couples by removing yet another layer of discriminatory treatment for same-sex partners, and it will, Crouch said, “change the landscape” for California’s registered domestic partners and same-sex married couples.
“Don’t think the Al Capone reference is too flip,” said Crouch, the owner of Strategic Accounting Solutions in Sacramento. “Sometimes big changes come from the strangest places.”
In three recent documents—two memorandums and a letter, dated May 5, May 6 and May 28 respectively—the IRS noted that California domestic partners have been granted full community-property treatment under state tax law since 2007 (the result of Senate Bill 1827, passed in 2006). Given that “federal tax law generally respects state property law characterizations and definitions,” the IRS views the individual incomes of both members of a registered domestic partnership to be community property.
That means that, even though domestic partners and same-sex married couples must still file separate federal tax returns, they will need to combine their total income and split it in half, with each partner taking responsibility for one half the federal tax obligation. The need for separate taxes at the federal level is required by DOMA.
The change will have some repercussions for the tax bill.
If both couples make approximately the same amount of money, their total tax bill should remain fairly constant. But if one partner makes more—or all—of the couple’s income, this change can significantly lower the tax owed. “Especially if there’s a large disparity of income, that’s where you’re going to see the most difference,” said Crouch. Decisions about amending prior returns will need to be made on a case-by-case basis.
Not all California registered domestic partners were married during the five-month window when same-sex marriage was legal in the state, and not all legally married same-sex couples are also RDPs. “The same-sex married couples are not addressed at all” in the documents, Crouch said. However, he pointed out that those couples have valid marriages in California and are under California’s community property law. “I would presume that I would treat them the same way,” he said, “but the IRS did not address that.”
What the IRS decision really amounts to is a step toward tax equality that asks more questions than it answers. SN&R contacted the IRS media representative for Sacramento County and was told that there would be no comment, as the agency would let the documents speak for themselves.
But what about taxing health insurance? Currently, when one partner in a domestic partnership or same-sex marriage obtains health insurance for the other at work, it is not taxable at the state level, but taxable at the federal level. “The partner who is getting the insurance has lower wages listed on his or her W-2 by the amount paid for health insurance for the state than wages listed for the federal government,” Crouch said. The question is, does the health-insurance benefit count as community property?
“The answer is: Stay tuned,” he said. California tax professionals will need to consult with each other and legal experts over the rest of this year in order to answer questions like this.
Crouch thinks that this decision will add at least one more layer of paperwork to the tax-filing process for same-sex couples. Currently, same-sex couples must file separate federal tax returns, complete a “fake” federal tax return as if they were married filing jointly, and then use that “fake” federal return to complete a state return as either RDPs or married filing jointly.
Yes, every step toward equality seems to add an additional level of paperwork for gay people.
“It’s not fair,” said Crouch, noting that a traditional married couple has nowhere near the hassle in filing taxes as same-sex couples do. “If they were really going to achieve full tax equality, they ought to let RDP couples and same-sex married couples file a joint federal return.”
But, hey, if the IRS could bring down Capone, maybe it can take down tax and marriage inequality, too.