Domestic Partners – Increased difficulties in filing income tax returns

By Frank Minuti, CPA

In September of 2006 California repealed the section of the State tax code that treated the income of one domestic partner as solely that partner’s income. Starting with the 2007 income tax returns California domestic partners were each taxed on one-half of each other’s income (unless they opted out of community property treatment).

For tax years beginning in 2007 domestic partners were allowed to file joint returns for California. They were not allowed to file joint federal returns. This meant that for tax years 2007-2009 domestic partners filed in effect three tax returns. A joint California and two “single” taxpayer returns, one for each partner reporting only that partner’s income and deductions on their separate federal return.

In May of 2010 the Office of the Chief Counsel, Internal Revenue Service published Memorandum Number 201021050 stating that technically the taxpayers should not have reported their individual income and deductions on their return but each individual’s return should have reported only one-half on their income and deductions and one-half of their partners income and deductions.

The Memorandum states that while amended returns are not required they can be filed for tax years beginning prior to June 1, 2010. Therefore all domestic partners will want to review their 2007-2009 federal income tax returns. In cases where one partner has a larger income that the other, they may be entitled to federal refunds if both amend their returns.

I spoke with one of the authors of the Memorandum in Washington D.C. to seek clarification as to how domestic partners should file their 2010 income tax returns and what was meant by the above noted "for tax years beginning prior to June 1, 2010". He indicated that the intent of the Memorandum is that tax returns filed for 2010 and beyond must be filed reporting one-half of each domestic partner’s income and deductions on the separate federal personal income tax returns of each partner filing as single taxpayers.

The most important consequence of this change is that it will create significantly more work for taxpayers this year filing as domestic partners than was required in the past. The change requires domestic partners to do more allocations and schedules than those taxpayers allowed to file joint income tax returns. If paid preparers are used the domestic partners should expect to be charged significantly higher fees than paid in past years due to the additional work involved in preparation of domestic partners tax returns.