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The annual income tax season is no fun for any of us but it can be a lot worse for same-sex couples in California, Nevada, and Washington. Those three states follow community property law and recognize either same-sex marriages or domestic partnerships. The combination makes tax filing an even bigger hassle than the rest of us face. Because the Defense of Marriage Act (DOMA) denies federal recognition of those relationships, the IRS applies special rules to same-sex couples in the three states, rules that don’t apply to couples—same- or opposite-sex—in other states. Those rules complicate tax filing and can result in higher (or lower) income and payroll tax bills. (I blogged yesterday on more general issues concerning DOMA and taxes.) Community property law generally requires that married couples split income evenly between spouses. That rule also applies to domestic partners in the three community property states that recognize them. Splitting income makes little difference for opposite-sex married couples but creates tax issues for same-sex partners because of DOMA. Here are just a few of the problems that the IRS has explained in various publications.
- Same-sex couples with children may or may not be allowed to file as heads of household. The issue revolves around the requirement that a head of household provide more than half the support for a dependent child. Because spending out of community property income comes equally from both partners, neither provides more than half the support, so neither can claim the dependent. Only if some support comes from non-community property may one partner file as head of household.
- Domestic partners in community property states must split the income from a business operated by one partner, even if the other partner has no involvement. In contrast, in the case of opposite-sex couples, earnings from a business are attributed only to a spouse who is actively involved in the business. Further, each domestic partner must pay self-employment tax on her half of business earnings, a situation from which a special provision protects opposite-sex couples. As a result, same-sex couples could pay as much as double the payroll tax that finances Social Security that an opposite-sex couple would pay.
- The IRS applies community property laws inconsistently with regard to tax credits. For example, the earned income credit, the dependent care credit, and the refundable portion of the child tax credit all ignore community property laws in determining a domestic partner’s earnings but split all income in measuring adjusted gross income.
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