IRS Creates Clash Between DOMA and State Sovereignty
The 1996 Defense of Marriage Act (DOMA) prohibits the recognition of same-sex couples by any arm of the federal government. Yet in mid-2010, the IRS reversed the way it recognizes same-sex marriages and registered domestic partnerships (RDPs) of citizens in community property states such as California, Nevada and Washington.
The ruling honored a state's right to recognize these relationships and aligned the IRS with the community property laws of each state.
After speaking with several tax specialists, I sat with Certified Public Accountant Jeremy Dutson of the San Diego accounting firm of Abbas, Jenson and Cundari, Certified Public Accountants. Dutton stressed immediately, that the full impact of the ruling is still being deciphered.
He pointed out that in California, all property owned by a married couple or RDP is considered either community property; "any asset acquired or income earned within the union" or separate property; "any asset or income earned outside the union." We began the interview on that point.
Isn't the implication that the IRS is recognizing same-sex couples?
Yes and no. The IRS is not giving these couples "married" filing status, but in a way this ruling does imply that the IRS recognizes that there is a relationship between the two individuals.
Why won't the IRS allow these couples to file as "Married Filing Jointly" or "Married Filing Separately?"
Unfortunately, DOMA prohibits the federal government from recognizing marriage as any thing other than "a civil union between one man and one woman."
How exactly does the ruling impact the way a Registered Domestic Partnership or a same-sex married couple file their taxes?
In short, all community property income must be split evenly between two separate "single status" tax returns. Any separate property will stay with the individual who owns it. This may sound easy, but there are many complications to this ruling.
What are the effects of splitting community property income between such couples?
Splitting community property income has negative and positive effects. The couples who benefit the most are those with a large disparity in income between them, which creates a lower effective (average) tax rate for the couple. Most same-sex couples where there is not a large gap between income levels, will see a tax increase. This increase is attributed to a large range and combination of variables.
The most frequent example is when one individual itemizes and the other takes the standard deduction. The new rule forces each individual to itemize and as a result, the standard deduction is lost. In 2010 the standard deduction was $5,700. The loss of such a large deduction will have a negative impact on one's tax liability.
Does this ruling penalize most same-sex couples?
To make a general statement as to whether most people benefit or are penalized by the ruling would be difficult. There are numerous contributing factors to consider in any given tax situation. Although, I can say the ruling has put an unfair burden on same-sex and RDP couples because most tax preparers charge more to file these more complicated and time consuming returns.
Are there any other areas that could possibly be impacted by this ruling?
Great point Bill-social security and VA benefits are examples of items that are,or can be, based on one's adjusted gross income-and this could negatively impact benefits. On benefit matters, I recommend contacting the issuing organization to see how they will deal with these community property tax returns under the revised ruling. One big tax advantage is that same-sex and RDP couples are not subject to the "Married Filing Separate" limitations that opposite-sex couples are. No doubt other financial and benefit impacts will become evident, as this ruling is totally dissected.
In short, fasten your seat belts! It's going to be a bumpy ride as the full impact of the ruling is sorted out. On the positive side, the sorting process will help to underscore the unconstitutionality of DOMA and likely lead to its repeal. In the meantime, review IRS publication number 555, seek advice from your tax accountant in regard to your personal circumstances and keep your eye on the pot of gold at the end of the rainbow-civil equality under the laws of the land! IRS publication number 555 can be found at: irs.gov/publications/p555/index.html
This 2010 IRS ruling was listed on the federal Taxpayer Advocates Service's list of "most serious problems".
Same-sex marriages and Registered Domestic Partnerships are now recognized in IA, CT, MA, NH, NY, DC and VT, but the IRS does not follow state law for the recognition of same-sex marriages. For federal purposes, DOMA defines marriage as "a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife." Gay and lesbian married couples still cannot file a federal tax return using the "Married-Filing-Jointly" or "Married-Filing-Separately" statuses, although nine states do permit gay couples to file jointly. Accordingly, same-sex couples that are legally married, in a civil union or in a RDP, must use a different filing status on the federal and state tax returns. Due to this added complexity, it is advised that you consult an experienced tax professional for advice on filing federal and state tax returns. This is an evolving issue and laws can change quickly, so check with your state's tax authority for the rules.
NOTE: The day after this interview, I attended a tax seminar for RDP and same-sex married couples in San Diego. John Chiang, California State Controller was the keynote speaker and was joined by tax attorney Larry A. Conway, one representative each from the California Franchise Tax Board and Board of Equalization and a professor of law-after the seminar, I spoke with Mr. Conway to confirm my assessment:
• The impact of the IRS ruling on RDP and same-sex married couples in community property states is complicated by what specifically constitutes community property. Currently, this ruling requires RDPs, or same-sex married couples in these states to prepare their single federal tax returns based on their state's community property rules. In each case, both must report their share of community property income, but each type of income can be split differently, depending on previously arranged agreements like nuptials and when income was earned, residency and other factors.
• There are many significant federal and state tax disadvantages and advantages created by this IRS ruling and DOMA: tax liabilities, divorce costs, filing costs and time, inheritance, property re-valuations, etc.
• Putting same-sex married and RDPs on an equal tax footing with opposite-sex married couples is a tangled web that cannot be fairly dealt with until DOMA is repealed.
Mr. Conway also provided the following statement:
"Same sex relationships didn't just begin with the advent of registration or marriage. Many couples have been together for decades, acquiring property before they were recognized as spouses under state law. While the IRS did the right thing in recognizing community property rights post-registration, the complexity of dividing community vs. separate income under such circumstances places an undue burden on a community already suffering from unequal treatment, which can only be rectified by allowing such couples to file joint returns as any other married couple are allowed.
IT GETS PERSONAL!
On September 15, Social Security Administration served notice to me of my responsibility to reimburse it for the majority of benefits paid me in 2010. The mid-2010 IRS ruling, mentioned above is retroactive to January 1, 2010. It made me liable for half of my husband's sole proprietor business income listed on Schedule C of his tax forms, while simultaneously preventing us (due to DOMA) from filling married single status-an option open to federally recognized marriages.
As a result, I am denied the $5,700 standard deduction, increasing our tax burden substantially. If this ruling stands, I will not be able to collect benefits until my 66th birthday, effectively reversing the early retirement benefits previously guaranteed and granted under existing laws and practices.
To add insult to injury, our net tax bill will be greater, and my husband will have earnings cut in half for the last years of his earning, thus lowering considerably the social security benefits he would have been entitled to under previous laws and allowable practices of which we had been planning our future upon. We have 30 days to appeal, and of course, will do so emphatically.
As the total impact unfolds, review the events surrounding the history of the mid-2010 IRS ruling I recommend several articles written by Scott James, columnist for The Bay Citizen and Emmy-Award winning television journalist and novelist and reader comments track the impact:
"For Same-Sex Couples,a Tax Victory that Doesn't Feel Like One"
"The Financial Hurdles Gay Couples Face"
"Tax Season Gets Trickier for Some Gay Couples
"Married Gay Couples Refuse to Lie on Tax Forms"
"What a repeal of the Gay Marriage Ban Means"
"From I.R.S. To Gay Couples, Headaches and Expenses"