Originally published on Forbes.com Oct 23rd, 2012
IRS just issued two FAQs, one for same sex married couples and the other for registered domestic partners (RDPs) in community property states. (Not sure about the second link being the most up to date). This stuff is really making me crazy. Don’t blame the IRS. As my blogging buddy Robert Flach, The Wandering Tax Pro, says it is the idiots in Congress. (I stole “mucking fess” from him too. Imitation is the sincerest form of flattery.) The two FAQs have some crazy stuff in them, but it is simply the reductio ad absurdum that the law requires. I know it won’t go anywhere but I am going to put out my proposal to clean up this mess, one more time. The fundamental problem is that the Internal Revenue Code is based on a lifestyle that is no longer so pervasive. Do you remember Father Knows Best ?
That’s the type of family they had in mind.
Before I go into the FAQs, here is what I wish Congress would do. Take dependency exemptions, personal exemption, the earned income credit, the child credit and a few other things and roll them, on a revenue neutral basis, into one single freely transferable credit for each person. Probably should make it refundable. Say that comes to $4,000. Then take our system of individual filing statuses – Married, Married Filing Separately, Single, Head of Household and chuck it. There would be only one filing status for an individual. We could call it something really clever like maybe – Individual. One other little tweak. Income from working should be taxed to the individual who earned it regardless of community property laws. As a bonus we might get rid of the alimony deduction and the corresponding income pickup. The main problem with all this is that the Tax Court might have to lay off a couple of judges.
As far as the FAQs go, they are not that hard to follow and you should definitely look at them if they apply to you or your clients. That would be if you are married to someone of the same sex as you or a registered domestic partner in a community property state. If none of that applies to you, you don’t need to look at them because I am going to give you the entertaining parts.
The Razor’s Edge
Q. Can a registered domestic partner qualify to file his or her tax return using head-of-household filing status?
A. Generally, to qualify as a head-of-household, a taxpayer must provide more than half the cost of maintaining his or her household during the taxable year, and that household must be the principal place of abode of the taxpayer’s dependent for more than half of the taxable year. If registered domestic partners pay all of the costs of maintaining the household from community funds, each partner is considered to have incurred half the cost and neither can qualify as head of household. However, one of the partners may pay more than half by contributing separate funds.
When Robin and Terry became RDPs they had absolutely nothing. So even though they each have a kid, neither one can qualify for head of household status because all their property is community property making it impossible for either one of them to ever pay for more than half of anything. Probably somebody who understands community property law better than I do will figure out a work around for this one.
RDP Can Be A Better Deal
Q. Can a registered domestic partner be a dependent of his or her partner for purposes of the dependency deduction under section 151 ?
A. A registered domestic partner can be a dependent of his or her partner if the requirements of sections 151 and 152 are met. However, it is unlikely that registered domestic partners will satisfy the gross income requirement of section 152(d)(1)(B) and the support requirement of section 152(d)(1)(C) . To satisfy the gross income requirement, an individual’s gross income must be less than the exemption amount ($3,700 for 2011). Because registered domestic partners each report half the combined community income earned by both partners, it is unlikely that a registered domestic partner will have gross income that is less than the exemption amount.
The part I emphasized drives home the point. The single rates are better than married filing jointly. By being treated as two single people who evenly split their aggregate income, RDPs really get the best of both worlds when it comes to rates. There are also many other planning opportunities that are available to couples who are either not legally married or whose legal marriages are not recognized. On net the whole mess creates so much aggravation that I doubt many people are gloating about the benefits that it provides.
Doesn’t This Looks Like Fun ?
Q. How should registered domestic partners report wages, other income items, and deductions on their federal income tax returns?
A. Registered domestic partners should report wages, other income items, and deductions according to the instructions to Form 1040, U.S. Individual Income Tax Return, and related schedules. In addition, registered domestic partners should attach the Allocation Worksheet in Table 2 of Publication 555, Community Property, to their separate returns showing how the partners computed the income, deductions, and federal income tax withholding that each reported. Each partner should write the social security number of the other partner in the “Notes” section of the worksheet. If a registered domestic partner does not attach a worksheet, he or she must attach a copy of his or her partner’s Form W-2 or 1099-R (in addition to his or her own) and make a notation on the form showing the division of income and tax withholding.
The rumor that this whole situation is the work of a cabal of California tax preparers who had too much time on their hands is probably unfounded. You can see above though that the people who have been spreading the rumor have something to base it on.
Defending The Traditional Family
Q. If a taxpayer adopts the child of his or her same-sex partner as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?
A. Yes. The adopting parent may claim an adoption credit to the extent provided under the law. The law does not allow taxpayers to claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse. However, this limitation does not apply to adoptions by same-sex partners because same-sex partners, even if married for state law purposes, are not treated as spouses under federal law.
You can really see the people who are running the master plan to defend traditional family structures at their most brilliant here. There is a federal adoption credit. Presumably, it is to encourage adoptions and they figure that step-parents don’t need extra encouragement to adopt step children so it does not apply to those adoptions. Unless it is a same sex couple. So if Heather’s second mom adopts her, there is a credit for that. But if Heather’s first mom had married a man who adopted her there would be no credit. Go figure.
There Is More To DOMA Than Taxes
My proposal is both bigger and smaller than the effect of Section 3 of DOMA on income taxes. It is smaller because Section 3 of DOMA affects many more areas of life such as immigration and pensions just to name a couple. It is bigger because it could simplify and clean up a lot of aggravation that is created by a Tax Code that is premised on family structures that are no longer as prevalent.
You can follow me on twitter @peterreillycpa.