RDP's... Does the IRS owe you money?
Have you filed your state income taxes as a registered domestic partner (RDP) in California? As you know, for your federal tax filing, you each still had to file as single, each partner claiming the income that was actually earned by that partner. If each of you earned similar amounts, this was not a bad deal. But if either earned significantly more than the other, a recent change (CCA 201021050) could be very favorable both in the current tax year, and with the potential to amend past returns dating back to 2007. Here's what the new change actually says:
"Applying the principle that federal law respects state law property characterizations, the federal tax treatment of community property should apply to California registered domestic partners. Consequently, for tax years beginning after December 31, 2006, a California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return."
OK... great, but what does this actually mean? It basically says that if your state considers your property to be community property because of the registered domestic partnership, then the IRS will base your income as shared equally for tax purposes. Here's an example:
Let's say that Bryan earns $110,000 of taxable income in 2010, and his partner, Lawrence, is a stay at home Dad, who had $3200 of taxable income in 2010. Previously, the IRS considered them unmarried for tax purposes, so Bryan and Lawrence would each pay income taxes on the money each of them actually earned. So for Bryan, who earned $110,000 of taxable income, the first dollar would be taxed at 10%, and the last dollar would be taxed at the 28% marginal tax bracket. His tax due would be $24,509, with an average or average tax rate of 22%. For Lawrence, all of his $3200 in taxable income would be taxed at 10%, for a tax bill of $320, resulting in a combined tax bill for their family of $24,928.
With this new ruling, they would still have to file their federal taxes as single individuals, but Bryan and Lawrence's income would be combined, and divided evenly between them. This would mean they would each report $56,600 ($110,000 + $3200 divided by 2) of taxable income, with taxes due of $10,331 each, for a combined tax bill for their family of $20,662, saving over $4,000 in income taxes.
And as I referenced at the beginning, this applies to tax years after 12/31/2006, so bottom line... if you are registered as a domestic partnership in CA* and one partner earns significantly more than the other, consider whether it would make sense to amend previous years. These tax return filings can be very complex, as it requires determinations on what income is community, and what is separate, not to mention the calculations and tracking from one partner to the other's tax return. More details can be found at http://www.irs.gov/pub/irs-wd/1021050.pdf, but you will have questions, and best to seek professional advice on this one to make sure it is done right. Feel free to call me at the number below, or email me at wjones@olsenpartners.com.
*This new ruling specifically applies to California RDP's, but potentially would apply to any state that treats RDP property as community property.
