Ask Lambda Legal: Community What?

Q: I just read a news article that says that as of this year, married same-sex couples in California must "split their income" on their federal tax returns for 2010. What does this mean, do I and my wife have to do it and, uh … is this good or bad?

A: The new IRS policy is mandatory for income earned in 2010 (returns for which are filed in 2011) and affects not just you and your wife, but all married couples in California—whether same-sex or different-sex—as well as all registered domestic partners (RDPs) in California, Nevada and Washington. Those are the three states that both have "community property" laws and that also recognize that same-sex couples can acquire community property. There are a total of 10 states with community property laws, but seven of those states (Alaska, Arizona, Idaho, Louisiana, New Mexico, Texas and Wisconsin) have not yet applied those laws to same-sex relationships.

Community property generally includes, for example, salaries and wages earned by either partner while the "community" is in existence—that is, after a couple gets married or registered as domestic partners but before either person dies or the relationship is dissolved. Community property is jointly owned by both individuals but divided equally upon dissolution of the relationship or death. This is in contrast to separate property, which includes things like income earned before the marriage or domestic partnership, and a gift or inheritance, which is not split equally.

Last May, the IRS announced it will apply California's community property laws to California RDPs to reflect "income-splitting" for community property. Income splitting means each partner reports an average of both incomes on his or her return. In other words, if one partner is an architect earning $100,000 a year, and the other partner is a full-time graduate student without a separate income, they would each report $50,000 dollars in income on their returns to the IRS. While the student would end up paying more in taxes, the architect would fall in a lower tax bracket, and the couple would pay less overall. The IRS has also said that this change will apply similarly to same-sex spouses in California and RDPs in Washington and Nevada. Keep in mind, though, that this does not mean same-sex spouses may file as "married"; the so-called Defense of Marriage Act continues to prohibit that.

Like all signs of progress, this one comes with growing pains: it makes preparation of tax returns more complicated for many couples during this period of change and, depending on their income, a few may end up paying more in taxes under the new income-splitting policy. But it's likely that many more will pay less. Either way, this still represents a step in the direction of treating legally committed same-sex couples the same as married heterosexuals and is welcome progress towards our community's goal of full legal equality.

Although we cannot provide tax advice, we encourage people to read more about the IRS policy or call our Western Regional Office Help Desk at 213-382-7600, ext. 330.