The IRS has just issued a significant private letter ruling affecting registered domestic partners in California — they must now each report half of their community earnings on their federal individual tax returns. As the SF Chronicle reports, the IRS’s decision reverses its earlier position requiring California’s registered domestic partners to each report on their own federal tax return only the income they personally earned, not one-half of their community income.
As illustrated in the Chronicle article, this decision means that, if one partner earns $100,000 and the other earns $60,000, each would have to report $80,000, half their combined income. Each partner is entitled to half of the credits for income tax withholding from the paychecks, and both partners may be liable for unpaid taxes.
This ruling is a boon for domestic partnerships in which one partner is a high income earner and the other is not, because the high earner may benefit from income splitting by paying federal tax at the partner’s lower rate. For tax years beginning after December 31, 2006, and before June 1, 2010, registered domestic partners may, but are not required to, amend their federal returns. IRS Legal Memorandum 201021050 (.pdf).
The ruling clarifies the requirement to treat partnership earnings as community property for state property law and income tax purposes does not result in a taxable gift for gift tax purposes. IRS Letter Ruling 201021048 (.pdf).
For complete coverage of income, gift, and estate tax considerations for domestic partners, see California Domestic Partnerships, chap 15 (Cal CEB 2005).
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