Unmarried domestic partners can submit only individual 1040s; they cannot file jointly. How you handle 1040 forms depends on which community property state you call home.
Registered domestic partners and same sex married couples can find themselves at a tax crossroads come filing time. The difference between federal and state recognition of same-sex marriage and domestic partnerships can create challenges that married heterosexual couples do not face.
That's because, as of 2014, not all states recognize marriages between same sex couples. Domestic partners and same sex spouses, therefore, can submit only state tax returns based on the rules of the state where they are domiciled. Also, even if domestic partners can file a joint state tax return, they can only file individual federal tax returns unless they are legally married. How you handle state tax forms depends on which community property state you call home.
State status and community property
Five community property states—Arizona, Idaho, Louisiana, Texas and Wisconsin—do not extend community property rights to domestic partners or same-sex couples who were married in another state. This requires married same sex couples to use a non-married filing status for state tax return filing and a married filing status for federal tax return filing. Four community property states—California, Nevada, New Mexico, and Washington—recognize same sex marriages and apply that recognition to their community property laws. Some states recognize domestic partnerships and accept jointly flied tax returns but federal tax law does not recognize state domestic partnerships.
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.
Awareness of the evolving status of state marriage laws and legislative changes that affect financial decisions can lead to tax-saving decisions for same sex couples. Possible resources include the Human Rights Campaign, Gay & Lesbian Advocates & Defenders (GLAD), and Freedom to Marry.
Yours and mine
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 own 1040 or a joint 1040 if they are married. For registered partners, or a married couple filing separately, 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.
Ours—for domestic partners
For domestic partners, 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.
Domestic partners file separate federal tax returns
Regardless of what state you live in, each domestic partner prepares a separate federal return based on the Allocation Worksheet that you attach to it. You might consider including an explanatory note to remind the IRS of your situation.
California domestic partners file as individuals for federal filing, however, under California law, the state return must be filed as a married return. This requires the creation of 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 domestic partners. When one partner's contributions to the other exceeds $14,000 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."
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