Paul L. Caron

Sunday, June 6, 2010

WSJ: Gay Couples Get Equal Tax Treatment

Following up on Wednesday's post, IRS: California Registered Domestic Partners Can Split Income and Tax Withholding 50/50 Without Adverse Gift Tax Consequences: Weekend Wall Street Journal, Gay Couples Get Equal Tax Treatment, by Laura Meckler:

The IRS has ruled that same-sex couples must be treated the same as heterosexual couples under a feature of California tax law. Advocates for the change say it is the first time the agency has acknowledged gay couples as a unit for tax purposes.

The change reverses a 2006 IRS ruling and opens a tax benefit to many same-sex couples that wasn't available before. It may affect couples in Nevada and Washington state, as well.

Specifically, the agency said nearly 58,000 couples who are registered as domestic partners in California must combine their income and each report half of it on their separate tax returns. ...

Applying this rule to federal taxes offers clear tax benefits for people such as Mr. Rey—an executive who said he earns much more than his partner does—because it brings him into a lower tax bracket. ...

In 2005, the pair asked the IRS for clarification as to how they should file their taxes. The next year, the agency issued a memorandum stating that California domestic partners shouldn't apply the community-property standard to federal taxes because the relevant precedent didn't apply "outside the context of a husband and wife." "The relationship between registered domestic partners under the California Act is not marriage under California law," the agency said.

In 2007, the IRS was less definitive. In a private ruling sought by Mr. Rey and his partner, the agency declined to offer guidance either way.

When President Barack Obama was elected, Mr. Rey's tax attorney, Donald Read, thought they should try again, citing the White House Web site's professed commitment to "equal federal rights" for gay and lesbian couples. This time, the IRS said these couples not only may, but must, combine and then divide their income for federal tax purposes. It made that point in a new memo issued last month. ...

The IRS ruling has detractors. It doesn't appear to square with the Defense of Marriage Act, which bars federal agencies from recognizing same-sex couples, said David Herzig, an expert in tax law at Valparaiso University School of Law. That law, he said, means the IRS should not be recognizing these unions, even if state law directs otherwise. "We shouldn't be picking and choosing where these rules apply," he said. In passing the federal law, he said, "You made your bed."

Mr. Rey credits Mr. Obama's influence for the IRS's shift. "The fundamentals of the legal argument were the same as they had been before," he said. "This time we got a different result."


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What about those legal same sex marriage couples that married before prop 8? We are not domestic partners under state law but married (but can't file as married under fed law) Can same sex married couples in CA take advantage of this new IRS rule? I have sick feeling the 18,000 same sex married couples in CA are in limbo once again.

Posted by: Eric | Jun 11, 2010 7:47:59 PM

>In the examples given above, how does the new resulting tax load compare to a heterosexual married couple with the same total income that is required to file jointly?


It could be more, but it's usually less.

Posted by: AMTbuff | Jun 7, 2010 3:59:47 PM

In the examples given above, how does the new resulting tax load compare to a heterosexual married couple with the same total income that is required to file jointly?

Posted by: Curt | Jun 7, 2010 12:53:05 PM

Equal treatment? Not quite. Because of various marriage penalties in the tax code, this computation could yield a lower tax than for a married joint return, especially for the highest incomes. There may also be low-income cases in which the tax liability is higher for this method than for a married joint return.

It's an improvement for these taxpayers, but it's not equal tax treatment.

Posted by: AMTbuff | Jun 7, 2010 9:50:12 AM

If I lived with my brother in CA, could we do the same? Why or why not? Upon what basis should the IRS deny us the same benefit? After all, we would also be in a family situation in which we both contribute to the common, so why should it matter if we weren't sexually involved? Would a gay couple who chose to be celebate as a result of HIV infection likewise not be entitled to take advantage of this benefit?

Posted by: submandave | Jun 7, 2010 9:41:25 AM

because the law is for the little people

Posted by: Paul A'Barge | Jun 7, 2010 4:40:25 AM