Update on The

Federal Tax

Filing Requirements

for

Registered Domestic Partners

and

Same-Sex Married Couples

Disclaimer 

For purposes of Circular 230 and unless expressly stated otherwise, nothing contained in these materials is intended or written to be used or may be relied upon or used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended. This program is a source of general tax information. Each client's situation is unique and the tax results described in this program are no guarantee of the outcome that may result in a particular client's situation. Therefore, it is highly recommended that you seek professional tax advice.

Who is Subject to The Filing Requirement

Registered Domestic Partners in California, Washington State or Nevada

Or residing in California and were legally married in California or another state or

Canada where same-sex marriage is (was) legal

New federal filing requirements effective for 2010 and beyond

Defense of Marriage Limitations(DOMA)

Federal Law does not allow for the recognition of same-sex marriage, so the new Federal filing requirements are not based upon the IRS recognizing the RDP or the marriage; these requirements came about because the IRS must acknowledge that property rights are set by the State, and California is a Community Property State and confers community property upon all spouses.

Filing Requirementsfor RDPs and SS Married Couples

• California• Married Filing Joint (RDP/MFJ)• Married Filing Separately (RDP/MFS)

• Federal• Single• Head of Household

*** Some couples are considering testing the waters and filing Federal Joint Return after also filing as stated above, then amending those returns.

Returns to Prepare

Since 2007 when California required RDPs to file as RDP/MFJ or RDP/MFS in order to properly file returns, you need to prepare:

Mock Federal Joint Return (not filed) Joint California Return Single or Head of Household Federal Return for

each partner

Now since 2010, the same number of returns will be filed, but the Federal return will not recognize only each partners income and deductions, it must recognize the community property component of all items (if any)

Begin by reading the Instructions

IRS Form 1040 Instructions and

IRS Publication 17

A registered domestic partner in Nevada, Washington, or California (or a person in

California who is married to a person of the same sex) generally must report half the combined

community income earned by the individual and his or her domestic partner (or same-sex spouse).

See Publication 555.

IRS Publication 555Revised again 2/24/11

Defines Community and Separate Property

Gives Sample Worksheet

Download Publication 555 from http://www.irs.gov/pub/irs-pdf/p555.pdf

IRS Publication 555 was very recently updated and provides as

follows:

IRS Q&A(included in materials)

In late 2011, the IRS issued a series of answers to frequently asked questions regarding filing these returns. The responses were based strictly on their understanding of community property as it applies to a husband and wife, not to same-sex couples who do not have the same federal tax protections.

Those of us practicing in the community do not necessarily agree with the answers the IRS has provided, so be sure your preparer understands that those answers are not law, they are merely an interpretation.

When is the Characterization of Property Important

DIVORCE

DEATH

NOW FORINCOME TAX

PREPARATION

California Joint Tax Return

Separate Property

Separate Property

Community Property

Community Property Splitting Federal Returns

Community PropertyMy Federal

Tax ReturnYour FederalTax Return

Separate Property

Separate Property

What is Community PropertyCommunity Property is property:That you, your spouse or both acquire during

your marriage while you are domiciled in a community property state

That you and your spouse agreed to convert from separate to community property (Transmutation)

That cannot be identified as separate property

Community Income is income from:

Community property

Salaries, wages, or pay for services for you or spouse

Real estate treated as community

What is Separate PropertySeparate Property is:

Property owned separately before RDP or marriageMoney earned living in a non-community property

stateReceived as a gift or inheritance during RDP or

marriageBought with separate funds during RDP or marriageCommunity Property both agree to transmute to

separateProrata portion of property acquired with separate

funds

Separate Income is income from:

Separate Property. The income belongs to the spouse who owns the property

Some Income ExamplesCommunity Property Separate Property

Wages, earnings and self employment profits

Interest and dividends from CP accounts

Rental income from CPGains and Losses for

CP**Pension distributions

(prorated)Unemployment Income

Interest and dividends from SP accounts

AlimonyRental income from SP

assetsGains and Losses for SP

**IRA distributionsStock options (depends

upon action dates)

Social SecurityThe IRS has been asked to make a

determination on whether Social Security earnings are Community Property or Separate Property for couples effected by the CCA. As of this date, the IRS has not commented on this issue.

Please discuss this with your individual tax advisor to determine your own treatment of social security income.

Expenses

Just as income is allocated between spouses, expenses shall be allocated as well for all CP assets.

If the home is owned as a CP asset, then the deductions for mortgage interest and property taxes are split when paid with community property

Other itemized deductions are also split if paid from CP income, including employee business expenses

Payment of TaxesWithholding of Federal Taxes for CP wages is

split

Self-employment tax (discuss with your own advisor)

Estimated payments cannot be split, each partner must file their own

Forensic Accounting

Reasonable basis

Documentation of methodology

Agreement

.

Examples from Amended Returns:

Taxable Incomes

$ 82,258 & $0 – save $ (4,859)

$ 130,153 & $30,222 – save $

(1,153)

$ 296,444 & <$10,570> – save $ (22,496)

$ 612,243 & $32,231 – owes $ 560

Preparation CautionsBe cautious splitting certain items, such as:

1. Earned income – W-2 wages 2. Self-employment income 3. Qualified Dividends 4. Capital gains & losses 5. K-1 items of various character 6. Carryover losses 7. Losses from rental property 8. Items in partial years, beginning and end of

relationship

Amending Prior Returns

California RDPs and Married Couples may (but are not required to) amend 2008 (watch statute of limitations date- will depend upon date 2008 return was filed) and 2009Washington – 2008 & 2009, Nevada 2009

In order to amend, both partners MUST amend

Statute of Limitation for 2008 may run on April 15, 2012

Interest will be assessed for partner who owes

Filing LogisticsFile in two separate envelopesMark on top of return “Pursuant to CCA

201021050”Attach Pub 555 worksheetAttach and breakout all withholding

statementsInclude Power of AttorneyExpect IRS correspondenceAmended returns are processed nationwideFile extension for 2011Paper filing for amended and 2011

Domestic Partnership and Spousal Agreements

Partners/Spouses may enter into a formal agreement that affects and determines the status of their property and income, whether it is community property or separate property.

The IRS will accept such agreements when prepared and executed subject to strict formalities.

Other Tax/EP Issues to Consider

No Unlimited Marital Deduction on transfers between RDPs and Spouses

During lifetime or on death

2011 & 2012 Estate Tax Exclusion $5 Million

2011 & 2012 Gift Exclusion $5 Million

Presented by:

WENDY E. HARTMANN, Esq.BENNETT & ERDMAN

5670 WILSHIRE BOULEVARD, SUITE 1400LOS ANGELES, CALIFORNIA 90036

(323) 935-0041weh@bennetterdman.comwww.bennetterdman.com