IRS clarifies some issues for same-sex spouses and RDPs

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!

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One Response to IRS clarifies some issues for same-sex spouses and RDPs

  1. […] the last year has seen many, many questions from Registered Domestic Partners and same-sex spouses (more info on that), there are other scenarios when the community property rules have to be dealt with. A […]

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