Registered Domestic Partners and Same-Sex Spouses in California - More Questions Than Answers

Originally Published on forbes.com on September 24th,2011

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Questions and Answers for Registered Domestic Partners in Community Property States and Same-Sex Spouses in California

This series of questions and answers on the tax treatment of RDP’s and same-sex spouses in community property states is probably not a direct response to the letter Jim Mc Dermott sent to Commissioner Shulman recently.  Regardless this must be timely for people struggling with extended returns.

There are 19 questions answered, which I’m sure will raise at least another 38 or 57 or some other multiple of 19.  You can go to the link easily enough, so I am just going to comment on a couple of the questions.  As I usually do I will speak in terms of my mythical clients Robin and Terry, whose function in life is to help me avoid awkward pronoun problems. In this incarnation, they are California RDP’s.  They registered in 2007 and deregistered (apparently the correct term is terminated) last week.  Robin is a partner in a regional law firm and Terry works at Starbucks.  While they were together Robin’s child lived with them.

Don’t Forget About the Constitution

Q-2:  Can registered domestic partners or same-sex spouses whose marriage is recognized under state law file federal tax returns using a married filing jointly or married filing separately status?

A-2:  No.  Registered domestic partners cannot file using a married filing separately or jointly filing status, because they are not spouses as defined by federal law.  Likewise, same-sex partners who are married under state law may not file using a married filing separately or jointly filing status because federal law does not treat same-sex partners as spouses.  

I don’t entirely agree with the “likewise”. It is understandable that the IRS would put it that way, but the answer is debatable.  Gill v. OPM holds that Section 3 of DOMA is unconstitutional.  DOJ has determined that the constitutionality of Section 3 of DOMA is indefensible. I believe that this gives same sex married couples (although not RDP’s) a reasonable basis for filing jointly.  At the very least, if joint status would be advantageous, they should be protecting their rights for open years by filing timely refund claims.  As RDP’s, Robin and Terry do not have skin in this particular game.  If they had married in 2008, they might.

On the Edge of the Knife

Q-3:  Can a registered domestic partner qualify to file his or her tax returnusing head-of-household filing status?

A-3:  Generally, to qualify as a head-of-household, a taxpayer must provide more than half the cost of maintaining his or her household during the taxable year, and that household must be the principal place of abode of the taxpayer’s dependent for more than half of the taxable year.  If registered domestic partners pay all of the costs of maintaining the household from community funds, each partner is considered to haveincurred half the cost and neither can qualify as head of household.  However, if one of the partners pays more than half by contributing separate funds, that partner may qualify as head-of-household. 

This one is kind of nasty.  Since everything is split down the middle neither partner can be HOH.  Even though Robin was the big earner in 2010 and the one with a child, Robin cannot be HOH, because Terry’s income is deemed to be exactly equal.  Hopefully Robin will be able to show  the expenditure of some amount from non-community funds to tilt the balance.

Think of the Children

Q-6:  If a child is a qualifying child under section 152(c) of both parents who are registered domestic partners, which parent may claim the child as a dependent?

A-6:  If a child is a qualifying child under section 152(c) of both parents who are registered domestic partners, either parent, but not both, may claim a dependency deduction for the qualifying child.  If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time.  If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income

 This one will have the IRS tied up in knots.  Because of the income splitting, the adjusted gross incomes of the partners will be identical.  I hope this ends up in Tax Court for some sort of Solomonic decision.  If the child meets the relationship test for both parents, maybe each one should take the deduction and don’t ask, don’t tell one another about it.  Use different preparers, if they don’t self prepare.  Since they are not married the IRS shouldn’t be able to tell Terry that Robin took the deduction or tell Robin that Terry took the deduction.  I have little doubt that Professor Cain, who covers this issue in greater depth than I do at the Same Sex Tax Law Blog would not approve of that maneuver.  I don’t either, but I hope somebody does it just to be ornery.

If They Hand You a Lemon –

Q-10:  Can a registered domestic partner itemize deductions if his or her partner claims a standard deduction? 

A-10:  Yes.  A registered domestic partner may itemize or claim the standard deduction regardless of whether his or her partner itemizes or claims the standard deduction.  Although the law prohibits one spouse from itemizing deductions if the other spouse claims the standard deduction (section 63(c)(6)(A)), registered domestic partners are not spouses as defined by federal law and this provision does not apply to them.     

Q-17:  If a registered domestic partner adopts the child of his or her partner as a second parent or co-parent, may the adopting parent claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

A-17:  The adopting parent may claim an adoption credit to the extent provided under § 36C.  Section 36C(d)(1)(C) does not allow taxpayers to claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse.  However, the limitation in section 36C(d)(1)(C) does not apply to adoptions by registered domestic partners because registered domestic partners are not spouses as defined by federal law.    

Both these questions are of the “make lemonade” variety.  Being married is not an unmixed blessing when it comes to taxation.  One of my earliest posts “Just Because They Won’t Let Your Do it Doesn’t Make it a Good Idea” points out the numerous ways in which an unmarried couple can exploit their unmarried status.  Question 10 is one I mentioned.  I had not thought of Question 17.

Payment Problems

Q-13:  Are registered domestic partners each entitled to take credit for half of the total estimated tax payments paid by the partners?

A-13:  No.  Unlike withholding credits, which are allowed to the person who is taxed on the income from which the tax is withheld, a registered domestic partner can take credit only for the estimated tax payments that he or she made.  

Let’s say that the accounting department of Robin’s law firm cuts the federal estimated tax payments for its partners.  There will be four big estimated tax payments with Robins SSN, which all get applied to Robin’s return along with one half of Terry’s measly withholdings from Starbucks.  Terry is being taxed on half of Robin’s K-1 income along with half of Terry’s W-2 with only  a little withholding.  Possibly some significant underpayment penalties there, although Terry’s 2009 income was probably low, which might mitigate the penalties.  But Robin and Terry are deregistered.  This is going to be really ugly once collections gets hold of it.  IRS collections does take the community property laws into account as I pointed out in a recent post.  There probably is some way for them to go after Robin for Terry’s deficiency, but it will not be pretty.

Windfall for “Unmarried” Couples ?

Q-19: Are registered domestic partners who reported income without regard to community property laws required to amend their pre-2010 returns to each report half the combined community income of the partners?

A-19: Registered domestic partners who reported community income without regard to community property laws for a taxable year beginning before 2010 are generally not required to amend those returns to report half of the community income.  ……….. if one of the partners amends his or her return to report half of the community income, the other partner must report the other half. 

When I first wrote about this issue over a year ago, I titled the postWindfall for “Unmarried” Couples, because about the second thing I thought of was for Robin to file for a couple of years of refunds and for Terry to do nothing.  I found one other commentator who had the same wicked idea.  Professor Cain really dislikes the idea and I have to say I am in sympathy with that sentiment.  Now the IRS has made it clear that if one partner amends, then the other must also amend.  There is only one problem.  Robin and Terry are not speaking with one another.  There are mutual restraining orders in effect and Robin gets nervous whenever in the vicinity of a Starbucks.  If you want to extend the scenario out a little further, what if Terry dies ?  How well do you think Robin gets along with Terry’s parents ? Don’t get me started.  What will the IRS do when Robin files the refund claims and Terry is not to be found ?  What will the Courts do ?

A Radical Solution

What I would like to see in the Internal Revenue Code of 2013 is for every individual to be given a freely transferable credit, I’m going to throw out $2,500.  That would replace dependency deductions and personal exemptions.  There would be one individual filing status called – Individual.  Make whatever domestic arrangements you want.  The social workers will make sure you don’t neglect the children and ASPCA will make sure you don’t frighten the horses, but the IRS will have nothing to do with it.  That would solve the DOMA problem, but the community property issue would still be there.  I’ll think about that tomorrow.