IRS changes tax rules for domestic partners in Washington State!

Judi O'Kelley of Lambda Legal, Seattle

By Jackson Holtz
OUTview Special

The IRS has changed the rules for how registered domestic partners in Washington need to file taxes.

Domestic partners now are required to split their income on federal tax returns beginning in 2010.

The change has created confusion among many domestic partners who are trying to complete income taxes by the April 18 deadline. Several tax accountants don’t understand the complexity of the change either.

“It’s a real problem, we need to get the word out,” said Judi O’Kelley of Lambda Legal in Seattle. Lambda Legal has been on the front lines working with the IRS in Washington, California and Nevada, the three states where community property rights have been extended to registered domestic partners (and same sex married couples in California).

More than 8,500 domestic couples are registered with Washington state, said Brian Zylstra of the Secretary of State’s office.

Changes to Washington law granted community property rights to those couples on June 12, 2008. It took until November 2010 for the IRS to clarify that domestic partners in Washington must split their income when filing their individual returns.

“It’s mandatory,” for 2010 federal taxes, O’Kelley said. Couples have the option to amend their returns back to 2008 if they choose.

Since federal law doesn’t recognize same-sex marriages, domestic partners cannot file joint returns. The IRS is recognizing the property, not the relationship, so the change is not a violation of the Defense of Marriage Act.

“It does feel frustrating,” O’Kelley said.

Under the rules, if one person makes $50,000 and the other partner earns $25,000, they’d combine the salaries and each report $37,500 in income.

“Overall that should drop your tax burden,” O’Kelley said.

The change in filing requirements may cause problems for some people, especially those who qualify for various types of financial assistance or public benefits. If that person’s partner earns a substantial income, the resulting split income could threaten a person’s ability to qualify for assistance.

It’s also unclear how social security income should be treated under the new rules.

These are the types of special circumstance many domestic partners are facing. The best advice is to consult a tax accountant or a lawyer familiar with domestic partnerships and find a solution, O’Kelley said.

Moving forward, some couples may want to draft domestic partnership agreements – similar to pre-nuptial agreements – to determine how some income can be separated and owned individually instead of communally.

That document is best drafted by lawyers, experts said.

MORE INFORMATION:
Domestic partner income-tax filing
Tips for registered domestic partners filing 2010 federal tax returns:
• Work together as a couple. Each individual return should match up.
• Consider using an estate attorney to draft a domestic partnership agreement and clarify property ownership.
• Use the same tax preparer or CPA to avoid confusion.
• E-filing isn’t set up to accept returns from domestic partners. Plan to mail the returns.
• Watch out for tax software. Programs including Turbo-Tax may not be able to properly process the return, and users might have to override the software.
• Extensions are helpful. People still must pay estimated taxes, but filing for an extension allows people time to get returns in order.
• Mail each return in its own envelope. Attach both W-2s and the appropriate publication 555 worksheets.
• Write “Filed pursuant to CCA 2010-21050” on the front of the return. Many IRS processors may not be familiar with the new rules. Avoid problems by calling attention to the ruling.
• Open all mail from the IRS and respond promptly. If the return is rejected, mail it in again, or ask a professional for help.
• If people have questions or are confused, this may be the year to hire an accountant. Call Lambda Legal at 213-382-7600 for a referral. Lambda Legal developed a helpful document available at http://www.lambdalegal.org/publications/factsheets/fs_the-irs-applies-income-splitting-community-property.html.
• For more information, see IRS publication 555 on the Web: 1.usa.gov/eZFNAV