Will The IRS’s New ‘Community Property’ Filing Requirements Save You A Couple Gs?

A new IRS ruling that effects only same-sex married couples or registered domestic partners in California, Nevada, and Washington could be a tax savings boon! Or it could seem like a giant tax penalty! It all depends on how much you are your husband or wife make. The Sacramento Bee explains:

Many same-sex couples in several states are getting a tax break this year from the IRS, according to new requirements to report their combined income on federal tax returns. Under so-called “income splitting,” the IRS is requiring all same-sex married couples or registered domestic partners to divide their combined income equally and report it on their separate tax returns. The IRS ruling applies in only three states – California, Nevada and Washington – that have community property laws and that recognize married same-sex couples and registered domestic partners.

So how to know if you’re coming out on, um, top?

Those who will save the most are same-sex couples with the biggest disparities in income. For instance, if one partner earns $100,000 and the other is a stay-at-home spouse with little or no income, they’ll split their combined community earnings on their individual tax returns, with each reporting $50,000 in income. The result: an overall lower tax bill for both. As an example, Lambda officials cited the hypothetical couple of “David,” an attorney earning $225,000, and “Richard,” a librarian with $20,000 in income. They’d have combined tax savings of $6,824.

Keep in mind, because DOMA is still the law of the land gay couples must still file separate returns, and these new rules might add another hour or two to your accountant’s preparation work.

Tax preparers such as Guy Crouch, a Sacramento CPA who does 75 or 80 tax returns a year for same-sex couples, say the new rules are likely going to be a little more complicated and costly for his clients, at least in the short term. Some returns under the new income-splitting requirements could take twice as long to prepare, he said.
“We have to go through every single item of income and determine if it’s community property or separate property. Then you have to do the same with expenses and deductions. If there’s a prenup (prenuptial agreement), that has to be taken into account. Then you develop a IRS worksheet that has to be attached and show how you split everything up,” because the reported income won’t match what’s on an employer’s W-2 statement. Because of the added complexity, Crouch said that most tax preparers he knows are not filing these returns electronically, but preferring to submit them on paper so they’re handled manually.