RDP Taxes

As you may have notice, the entire reason this new IRS tax filing procedure for registered domestic partners and same sex married couples came about is because of the principle of community property. In a nutshell, community property means that what’s yours is mine, and what’s mine is yours, share and share alike. In order to determine what community is and what is separate, it is best to seek legal advice to explain your specific situation. That said, here are a few key points:

• Any income that is earned during the period that you are in the partnership or married becomes community.
• Separate property is generally property acquired prior to being married or becoming registered as domestic partners.  Separate property value increases during the partnership or marriage is community property.  What that means is that if you owned a home prior to becoming registered as a domestic partnership.  When you registered, the value was $250,000.  Seven years later, you sold the home for $400,000.  The $150,000 in gains would be considered community property.
• Income from separate property is separate, but once it is co-mingled with community income, or is spent on items, it becomes community.   Stock dividends or capital gains could fall in this category, as it does not qualify as “earned income”.
• IRA contributions and distributions are generally considered separate property.
• Income from pensions will be considered separate or community, largely depending on the timing of the funding.  If it was funded entirely when you were married or in a domestic partnership, then it would likely be considered community.
• Social Security income is generally considered separate, but there is debate on this.
• Gifts or inheritances are generally considered separate property.
• Any property can be identified as separate, if added to a separate property agreement, and conversely, and separate property can be converted to community via an agreement.
• IRS Publication 555 has a lot more details on this subject, especially as it relates to taxes.

The concept for filing domestic partnership returns is simple:

1. Add up your income, and report half on each partner’s return.
2. Add up your deductions, and report half on each partner’s return.
3. Create a table that shows the income, deduction, and each partner’s share.  For tax years 2012 and after, use IRS Form 8958.
4. Print it all out and mail it in, or e-file if available.

The more complicated part is in the details, but here are a few ideas to keep in mind:

• Keep in mind what is community property, and what is not and only split those items that are community under state law.  Refer to “Understanding Community Property” for a primer on what is considered “community”.
• Track all the income, what is community and what is separate, in a spreadsheet for easy reference.  You would then enter the appropriate items on each line of the tax return, and then use this to complete the new IRS Form 8958, which breaks down the income and deductions, how it was split, along with totals. This form, 8958, will need to be included with the tax return.
• For Schedule C income, it can be split at the Schedule C level, or the net income that pulls to 1040 line 12 can be split, and added to Line 21 as “Community Property Schedule C Allocation”.  There is some debate on this method, as it impacts what is called Self Employment taxes.  In the past, we generally split the net income based on the spirit of how Self Employment taxes are supposed to work.  However, we may change if specific rulings are issued.
• Remember that the amount you ADD to one spouse’s return should equal the amount you DEDUCT from the other.
• Do the same with the deductions, and combine each category on Schedule A, if applicable.
• You are able to split any taxes withheld, both federal and state, but NOT estimated tax payments.
• With the new form 8958, you should be able to e-file, as we have for our clients for several years now.  If you are paper filing the returns, print them out, and write on the top of the return in RED “Filing Pursuant to CCA 201021050”. This will help the IRS know how to process it correctly.