IRS clarifies some issues for same-sex spouses and RDPs

September 25, 2011

So here’s a good lesson for individuals dealing with particularly thorny issues with the IRS, particularly if they’re systemic: Write your Senator or Representative.

For well over a year now, Registered Domestic Partners and Same-Sex Spouses in California, Nevada, and Washington have been struggling to comply with the federal tax law since the IRS announced they must continue to file separate returns with Single filing status, but also applying community property law. I won’t go into detail here (though there’s plenty more info here, here, etc.), but the point is the IRS announced that same-sex partners in community property states must apply very complex rules in reporting their income, deductions, and withholding; and then issued very little additional guidance.

Many couples have encountered numerous problems and systemic errors when attempting to simply comply with the law and file their tax returns. Countless phone calls have been made and letters written to numerous departments in the IRS, and the independent Taxpayer Advocate Service. Finally, on September 19, 75 members of Congress sent a letter to the IRS Commissioner asking the IRS to provide greater clarity for same-sex couples subject to these rules.

Well, lo and behold, just two days later the IRS posted additional guidance on its website. Now that’s service!

To be honest, there was nothing too surprising in the new FAQ to those of us who’ve been dealing with this issue for the last year. For the most part it simply confirmed what many preparers have struggled to determine through extensive study of the Internal Revenue Code, Regulations, and case law. Fortunately, it confirmed many of the advantages same-sex partners can receive as a result of not being recognized as “spouses” under Federal law.

However, the FAQ did reinforce  a rather absurd treatment of self-employment income. A taxpayer is now liable for self-employment tax on their partner’s business, even though they personally have absolutely nothing to do with it. This is due to an unfortunate placement of the term “spouse” in the tax code section addressing self-employment income…and the IRS’ insistence on enforcing the letter of the law instead of the clear intent of the law. I expect this will be challenged in court eventually by somebody severely negatively affected by this treatment. It should be noted that the net effect of this treatment is neutral across all same-sex couples, but some couples will receive a considerable benefit while others will be negatively impacted, depending on the complete tax situation.

One other item to note; if you or your partner have to make estimated payments (due to self-employment, investment income, or other reasons), you should both plan on making estimated payments in order to avoid penalties. Withholding from wages and other sources of community income are automatically split equally between both partners. Estimated payments, however, can not be divided up between partners. They belong entirely to the partner who makes the payment.

If you’re in a Registered Domestic Partnership or same-sex marriage, you should definitely review the new guidance for questions that may apply to you. And even if you normally prepare your own taxes or have a very simple return, it’s definitely a good idea to at least have a consultation with an experienced professional to make sure you correctly understand all the nuances that may affect you. But the real lesson here, for any taxpayer, is if you’re not getting reasonable treatment from the IRS, talk to your elected representative! When members of Congress make a request, the IRS responds!


More good news about cell phones and small businesses

September 15, 2011

The IRS just put out a notice and a memo (details below) providing guidance for businesses who provide cell phones to workers or reimburse workers for business use of personal cell phones. The effect is to further loosen the once incredibly onerous restrictions on deducting cell phone usage. (See my earlier post on the topic.) Not long ago, workers who used a company cell phone for personal calls were expected to document their personal usage and allocate part of the cost of service as income based on personal usage. And workers who were required to use a personal phone for business usage would have to include any company reimbursements as income. Now the personal use of a company phone and reimbursements for a personal phone used for business are all considered tax-free de minimis benefits.

Neither the notice nor memo directly addressed the issue of self-employed individuals who must use their own cell phone for their business. However, the two items do provide a very reasonable basis for deducting the entire cost of a cell phone if it is necessary for operating the business. It’s not guaranteed such a deduction would be allowed–certainly the particular facts of each case would matter–but I’ll feel confident advising many of my self-employed clients to deduct the full cost of their cell phone plans going forward.

IRS Issues Guidance on Tax Treatment of Cell Phones; Provides Small Business Recordkeeping Relief 

WASHINGTON — The Internal Revenue Service today issued guidance designed to clarify the tax treatment of employer-provided cell phones.

The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last fall, that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

The Notice issued today provides guidance on the treatment of employer- provided cell phones as an excludible fringe benefit. The Notice provides that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

Simultaneously with the Notice, the IRS announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.

Under the guidance issued today, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.

Details are in the memo and in Notice 2011-72, posted today on IRS.gov.


Seven Tax Tips for Recently Married Taxpayers

September 13, 2011

I attended several weddings this spring and summer…which of course for me often means providing some tax advice to newlyweds :-)

[NOTE: Everything in this article pertains only to those couples recognized as “married” under federal law. So even if you’re married under state law, the religious law of your faith, Canadian law, maritime law, Murphy’s law, or anything else, the IRS only recognizes federal marriage law. And if you’ve followed this blog before, that can mean a lot of headaches, but surprisingly a few big advantages, for same-sex spouses. But this article is just talking about marriages recognized under federal law.]

One big mistake newly married couples frequently make is using the Married Filing Separate (MFS) status because they don’t feel like they’re ready to “merge their finances” yet. In almost every case, filing MFS will result in a higher combined tax liability, often by a significant amount. In fact, in years of getting the question about whether it’s better to file separate or jointly, I’ve only been able to think of three scenarios in which filing separately might produce a better result…and even in these unusual cases joint filing is still typically better. The three scenarios where separate filing might be better are:

  1. Both spouses earn incomes of about $150k or higher.
  2. Both spouses have income, but one has very large job-related expenses.
  3. Both spouses have income, but one has very large medical expenses.
If you’re in one of those 3 situations, it’s worth running the numbers both ways. Otherwise, filing jointly is going to give you the better result 999,999 times out of 1,000,000. The only other reason not to file jointly is if you have doubts about whether your spouse is disclosing all income and you don’t want to be liable for penalties that may result if caught. And let’s hope that’s not your situation because you need more than just good tax advice!
Finally, one thing the IRS doesn’t mention is if you filed separately without realizing what it would cost you, you can always go back and amend your return, for up to three years after filing, to claim the extra savings. However, it doesn’t work the other way around. If you file jointly, and then realize after the deadline passes that you would have been better filing separately, you can’t amend your return to go from joint to separate filing after the filing deadline. So it’s probably always a good idea to run that first joint return (and any joint return for years with significant changes) by a professional before filing, just in case you’re in one of those unusual situations where separate filing is better.
And now, for a few words from the IRS on the topic:

IRS Summertime Tax Tip 2011-20

With the summer wedding season in full swing, the Internal Revenue Service advises the soon-to-be married and the just married to review their changing tax status. If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are seven tips for newlyweds.

  1. Notify the Social Security Administration Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at www.ssa.gov, by calling             800-772-1213       or at local offices.

  2. Notify the IRS if you move If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from www.IRS.gov or order it by calling             800–TAX–FORM       (            800–829–3676      ).

  3. Notify the U.S. Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.

  4. Notify your employer Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.

  5. Check your withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on www.irs.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee’s Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.

  6. Select the right tax form Choosing the right individual income tax form can help save money. Newly married taxpayers may find that they now have enough deductions to itemize on their tax returns. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.

  7. Choose the best filing status A person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.

For more information about changing your name, address and income tax withholding visit www.irs.gov.  IRS forms and publications can be obtained from www.irs.gov or by calling 800-829-3676.