Tax Tips for Registered Domestic Partners and Same-Sex Couples in Community Property States
Same-sex couples and domestic partners find themselves at a tax crossroads come filing time. The Internal Revenue Service and state definitions of marriage create challenges that married heterosexual couples do not face.
That's because, as of 2012, the IRS follows DOMA -- the Defense of Marriage Act -- which only recognizes marriage between a man and woman. Domestic partners, therefore, can submit only individual 1040s; they cannot file jointly. How you handle 1040 forms depends on which community property state you call home.
Six community property states -- Arizona, Idaho, Louisiana, New Mexico, Texas and Wisconsin -- share the DOMA definition, and do not extend community property rights to domestic partners or same-sex couples. This simplifies tax preparation because both partners use either the single, head of household or, depending on their circumstances, qualifying widow/er filing status for both state and federal returns. Three community property states -- California, Nevada and Washington -- recognize gay and lesbian marriages and apply that recognition to their community property laws.
Nevada and Washington have no personal income tax; however, like their counterparts in California, same-sex couples in Nevada and Washington must evaluate their finances according to community property law when preparing their federal tax returns. They are still bound to the IRS mandate that limits their federal filing status to single or head of household.
As a same-sex couple, awareness of the evolving status of LGBT marriage in your state and legislative changes that affect your financial life can lead you to tax-saving decisions. Possible resources include the Human Rights Campaign, Gay & Lesbian Advocates & Defenders (GLAD), and Freedom to Marry.
Dedicating time to preparation makes tax time easier. Both partners need to round up their income- and deduction-related documents for the tax year. Each identifies assets, debts and income that belong to him -- his separate property. This could be inherited or gifted investments and real estate, school loans assumed before the marriage, or income earned when living in a non-community property state, for example.
Each partner includes income from his separate property on his 1040. This is the time to review your agreements regarding bank accounts, home ownership and children to determine what filing status you can choose. Being able to document that expenses related to providing a home came from separate income helps to support the head-of-household choice.
The "ours" aspect of your preparation covers community property income and deductions. Using the Allocation Worksheet from the IRS's community property publication 555, you can establish your shared, or community, income for each category of income such as wages, dividends and interest. Divide the totals in half to give each of you 50 percent.
Deductions for business expenses from a community property such as a business you own together, get split 50-50; however, deductible expenses paid with a partner's separate funds can only be entered on that partner's return. The IRS lets one of you take the standard deduction while the other one itemizes. Paying deductible expenses with a joint account that you both actively use lets the itemizing partner include them on his return.
If you adopt children who are not biologically related to either partner, both of you can use the adoption credit, but only one of you can claim each child as a dependent.
Regardless of what state you live in, each of you prepares a separate federal return based on the Allocation Worksheet that you attach to it. You might consider including an explanatory note or copy of your marriage certificate to remind the IRS of your situation and to avoid misinterpretations of your marital status when shopping for insurance or a mortgage.
If you're California residents, your separate federal tax returns will satisfy IRS filing requirements; however, they cannot be used to prepare your California state tax return.
Under California law, you file as a married couple, so you need to create a “mock” federal return that reflects joint-filing status. This is just to get the numbers you need to fill in the sections of your state return that use numbers from a "married filing jointly" federal return. This ”mock” federal return never goes to the IRS; you submit it with your California state return.
Sharing living expenses carries tax implications for married same-sex couples. When one partner's contributions to the other exceeds $13,000 in a year, he could face a gift tax and the need to file form 709. For example, treating your partner to a vacation abroad and paying with your own money becomes a gift under the law. To manage your tax exposure, you might consider paying shared costs through a joint checking account and keeping track of "who pays what."