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Sunday, February 20, 2011

WSJ: Same-Sex Couples in CA, NV & WA Reap Big Federal Tax Bonuses

Wall Street Journal, Same-Sex Couples And The Marriage Penalty, by Laura Saunders:

Thanks to a 1996 federal law aimed at preserving traditional marriage, thousands of same-sex couples in California, Nevada, and Washington state could get big tax bonuses on their federal returns starting this year. The bonuses are off-limits to heterosexual married couples—a sharp reminder of the "marriage penalty" that often dings two-earner couples. ...

All three states recognize domestic partnerships and also have what is known as community-property law. Community property refers to a system of ownership in nine states that usually attributes income and property acquired during marriage equally to both partners, regardless of who earned it. (The nine states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.)

The three states also now apply community-property laws to registered domestic partners. So the IRS—which must follow state property laws—has ruled that these couples should figure their total community income and split it down the middle, starting in 2010.

That is where the benefit comes in. Although domestic partners must divide their income equally, the federal Defense of Marriage Act prevents the IRS from treating these couples as married joint filers. So for 2010 and after, each partner will claim half the community income but still file as single or head of household.

The result, in many cases, is a federal tax savings because a couple will avoid the marriage penalty that often raises taxes for two-earner heterosexual married couples.

http://taxprof.typepad.com/taxprof_blog/2011/02/wsj-same-sex-.html

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Comments

Ah yes, the Law of Unintended Consequences strikes again.

Am I the only one who sees the irony in all of this from a Defense of Marriage Act point of view? A perfect example of what happens when big government activists try to use the Federal Government to legislate private behavior.

Posted by: Sid (real one) | Feb 20, 2011 2:16:03 PM

This article simplifies the situation, which is anything but simple.

See http://www.SSRN.com/abstract=1738809

Posted by: Francine J. Lipman | Feb 20, 2011 4:29:02 PM

There are two sides to every story; the WSJ often looks at only one. A practitioner who specializes in this type of return tells me: "While SOME couples will have a lower combined tax under community property laws, I don't see this as the outcome for the majority. If the couple both make similar incomes, the end result will be minimally different from what it was before, but involve a whole lot of unnecessary effort (and cost ... no consumer tax software handles this) to get there.

"It also eliminates the concept of one partner paying the deductible expenses (mortgage interest, taxes, charity, etc.) for the couple, while the other claims the standard deduction, thus turning $10K worth of deductions into $15.7K with the standard deduction the non-itemizer gets."

Posted by: Bob | Feb 20, 2011 10:10:06 PM

Sounds a bit urban mythtical to me. Let's see some real examples with real numbers. Four ought to do it- two with equal taxable incomes with standard and itemized deductions, two with unequal (1:3 is probably about right), same situations. Extra credit: a set where both legitimately qualify for the EIC.

Stories like this often don't survive an example with numbers. Given the tax structure for single/HOH, the results seem unlikely to be so good as to be a 'big...bonus'.

Posted by: anon | Feb 21, 2011 8:21:10 AM

Gay libertarians in CA must be STOKED!!

Posted by: Dr. Kenneth Noisewater | Feb 21, 2011 8:43:33 AM

Let's cut through the "joint, married, not married, domestic partnership, itemized, etc. Simplify this garbage tax system.

Posted by: bobbymike | Feb 21, 2011 9:22:34 AM

While my post is somewhat off-topic from the above article it is similarly themed. Filing status has once again become an issue in New York State. The high cost of living in the Long Island area forces both spouses to work. Real estate taxes for a decent sized 1700 sq foot cape on a 80 x 100 foot lot in a mixed blue collar/white collar neighborhood run about $10,000 while home prices are about $450,000. It is the norm to see one spouse making $140,000 and another spouse making $84,000. They are doing well financially and not struggling, but are not well off. AMT hits this three child couple hard-- to the tune of about $6,500. If they divorced and the lower earning spouse claimed the three children and the higher earning spouse filed as single, the tax difference compared with married filing jointly is approximately $9,600. Per a 1970's PLR (offhand I cannot remember the cite)this couple could continue to live together and file this way as long as they did not enter into a cycle of "get married then get divorced". The $9,600 saving would be offset by a $1,500 extra cost in health care, assuming the higher or lower income earner could get coverage on their own. Just having run the numbers for this couple, I have found that they are better filing as married filing separately. The $1,600 (roughly) advantage of filing MFS still incurs AMT for both spouses. Yes, even the $84,000 spouse claiming the three children.

The point of this post is that perhaps we need to question a system that so penalizes a married couple where both spouses work. Indeed, the couple would struggle on $140,000 on Long Island in a small cape with three kids. The rest of the country does not seem to understand the extent of the tax and cost of living burden in New York. NYPD police officers, not considered well paid for the area, make $90,000 after five years before any overtime. And they struggle on this salary. AMT is a single stroke tax applied across all locality cost regions from inexpensive areas to high priced areas. Both the AMT and the "marraige penalty" need to be revisited and viewed in the light of the situation in 2010, not the late 1960's.

Posted by: Jim | Feb 21, 2011 11:24:33 AM

In my case, it has the oppisite result. I am retired, my partner is working. He has to push 1/2 his income to my side, but since RDP's were not allowed until recent history (even though we have been together 33 years), and retirement income from a pension is based on total years of service vs. years joined, I can only push a small amount to his side. Therefor, his 15% rate becomes my 25% rate.

Posted by: Mark | Feb 21, 2011 11:37:22 AM

@bobbymike: "The rest of the country does not seem to understand the extent of the tax and cost of living burden in New York."

And the rest of the country should be sympathetic why?

Sorry, but everyone gets to choose where they live. We chose Houston Texas in part because of the low cost of living and low taxes. Those living on Long Island, with "modest" incomes, chose poorly. Not my problem and not a federal problem.

Posted by: Texas | Feb 21, 2011 2:17:11 PM

@mark...hoooah!!! Right On!

Posted by: Giangho | Feb 22, 2011 2:05:45 AM