The Internal Revenue Service has ruled that same-sex couples must be treated the same as heterosexual couples under a feature of California tax law. Advocates for the change say it is the first time the agency has acknowledged gay couples as a unit for tax purposes.
The change reverses a 2006 IRS ruling and opens a tax benefit to many same-sex couples that wasn't available before. It may affect couples in Nevada and Washington state, as well.
Specifically, the agency said nearly 58,000 couples who are registered as domestic partners in California must combine their income and each report half of it on their separate tax returns. Same-sex couples account for an estimated 95% of the state's domestic partnerships; partnership status is also available to heterosexual couples in which one partner is over age 62.
"For the first time ever, I'm able to file federal taxes that, in a small way, acknowledges what's going on in my relationship," said Eric Rey of Berkeley, Calif. Mr. Rey and his partner requested the IRS ruling, first during the Bush administration and again this year.
The pair wed during a brief window when same-sex marriage was legal in California, but the issue arises because the men are registered as domestic partners. Same-sex couples, even if they are legally married in their home states, may not file joint federal tax returns. The federal Defense of Marriage Act, passed in 1996, defines marriage as between one man and one woman and bars federal agencies from interpreting it otherwise.
But the tax issue is more complicated in California, one of nine states with community-property rules. Those rules require married couples to treat all income as joint property for a variety of purposes. If they are filing taxes separately, the Supreme Court has said they must combine their incomes together and then divide the sum equally.
Beginning in 2005, California law directed that these same community property rules apply to registered domestic partners.
Applying this rule to federal taxes offers clear tax benefits for people such as Mr. Rey—an executive who said he earns much more than his partner does—because it brings him into a lower tax bracket. In 2007, he said, applying this standard would have cut his federal tax liability in half and more than doubled his partner's tax bill. Taken together, it would have saved them about $7,000, he said.
In 2005, the pair asked the IRS for clarification as to how they should file their taxes. The next year, the agency issued a memorandum stating that California domestic partners shouldn't apply the community-property standard to federal taxes because the relevant precedent didn't apply "outside the context of a husband and wife."
"The relationship between registered domestic partners under the California Act is not marriage under California law," the agency said.
In 2007, the IRS was less definitive. In a private ruling sought by Mr. Rey and his partner, the agency declined to offer guidance either way.
When President Barack Obama was elected, Mr. Rey's tax attorney, Donald Read, thought they should try again, citing the White House Web site's professed commitment to "equal federal rights" for gay and lesbian couples.
This time, the IRS said these couples not only may, but must, combine and then divide their income for federal tax purposes. It made that point in a new memo issued last month.
Mr. Read said it was the first time the IRS had given equal status to gay couples. IRS representatives wouldn't confirm his statement but couldn't point to any prior comparable decision.
An IRS spokesman said the shift is due to a 2007 change in state law. That change dealt with the way the state calculates income for California taxes. Nevada and Washington state are also community-property states that recognize domestic partnerships, and so couples there may also be affected.
The IRS ruling has detractors. It doesn't appear to square with the Defense of Marriage Act, which bars federal agencies from recognizing same-sex couples, said David Herzig, an expert in tax law at Valparaiso University School of Law. That law, he said, means the IRS should not be recognizing these unions, even if state law directs otherwise.
"We shouldn't be picking and choosing where these rules apply," he said. In passing the federal law, he said, "You made your bed."Mr. Rey credits Mr. Obama's influence for the IRS's shift. "The fundamentals of the legal argument were the same as they had been before," he said. "This time we got a different result."
Haiti Relief Donations Qualify
for Immediate Tax Relief
IR-2010-12, Jan. 25, 2010
WASHINGTON — People who give to
charities providing earthquake relief in Haiti can claim these donations on the
tax return they are completing this season, according to the Internal Revenue
Service.
Taxpayers who itemize deductions
on their 2009 return qualify for this special tax relief provision, enacted
Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010,
and before March 1, 2010, are eligible. This includes contributions made by
text message, check, credit card or debit card.
"Americans have opened
their hearts to help those affected by the Haiti earthquake," said IRS
Commissioner Doug Shulman." This new law provides an immediate tax benefit
for the many taxpayers who have made generous donations."
Taxpayers can benefit from their
donations, almost immediately, by filing their 2009 returns early, filing
electronically and choosing direct deposit. Refunds take as few as ten days and
can be directly deposited into a savings, checking or brokerage account, or
used to purchase Series I U.S. savings bonds.
The new law only applies to cash
(as opposed to property) contributions. The contributions must be made
specifically for the relief of victims in areas affected by the Jan. 12
earthquake in Haiti. Taxpayers have the option of deducting these contributions
on either their 2009 or 2010 returns, but not both.
To get a tax benefit, taxpayers
must itemize their deductions on Schedule A. Those who claim the standard
deduction, including all short-form filers, are not eligible.
Taxpayers should be sure their
contributions go to qualified charities. Most organizations eligible to receive
tax-deductible donations are listed in a searchable online database available
on IRS.gov under Search for Charities. Some organizations, such as churches or
governments, may be qualified even though they are not listed on IRS.gov.
Donors can find out more about organizations helping Haitian earthquake victims
from agencies such as USAID.
The IRS reminds donors that
contributions to foreign organizations generally are not deductible. IRS
Publication 526, Charitable Contributions, provides information on making
contributions to charities.
Federal law requires that
taxpayers keep a record of any deductible donations they make. For donations by
text message, a telephone bill will meet the recordkeeping requirement if it
shows the name of the donee organization, the date of the contribution and the
amount of the contribution. For cash contributions made by other means, be sure
to keep a bank record, such as a cancelled check, or a receipt from the charity
showing the name of the charity and the date and amount of the contribution.
Publication 526 has further details on the recordkeeping rules for cash
contributions.
This year’s special Haiti relief
provision is modeled on a 2005 law that, in the wake of the Dec. 26, 2004,
Indian Ocean tsunami, allowed taxpayers to deduct donations they made during
January 2005 as if they made the donations in 2004.
Five Facts about the Making
Work Pay Tax Credit
Working taxpayers may be eligible for the Making Work Pay tax
credit, a significant tax provision of the American Recovery and Reinvestment Act
of 2009. This tax credit means more take-home pay for millions of American
workers. Here are five things the IRS wants every taxpayer to know about the
Making Work Pay tax credit:
1. This credit -- available for tax years
2009 and 2010 -- equals 6.2 percent of a taxpayer's earned income. The maximum
credit for a married couple filing a joint return is $800 and $400 for other
taxpayers. Most wage earners have been enjoying a boost in their paychecks from
this credit since April.
2. Eligible self-employed taxpayers can
also benefit from the credit by evaluating their expected income tax liability.
If eligible, self-employed taxpayers can make the appropriate adjustments to
the amounts of their upcoming estimated tax payments in September and January.
3. Taxpayers who fall into any of the
following groups should review their tax withholding to ensure enough tax is
being withheld. Those who should pay particular attention to their
withholding include:
· Married couples with two incomes
· Individuals with multiple jobs
· Dependents
· Pensioners
· Social Security recipients who also work
· Workers without valid Social Security numbers
Having too little tax withheld could result in potentially
smaller refunds or, in limited instances, small balance due rather than an
expected refund.
4. The Making Work Pay tax credit is
either phased out or unavailable for higher-income taxpayers. The phase out
begins at $75,000 for single taxpayers and $150,000 for couples filing a joint
return.
5. For those who believe their current
withholding is not right for their personal situation, a quick withholding
check using the IRS withholding calculator on IRS.gov may be helpful. Taxpayers
can also do this by using the worksheets in IRS Publication 919, How Do I
Adjust My Withholding? Adjustments can be made by filing a revised Form W-4,
Employee's Withholding Allowance Certificate. Pensioners can adjust their
withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity
Payments.
For more information on this and other key tax provisions of the
Recovery Act, visit the official IRS Website at IRS.gov/Recovery.
WASHINGTON
– The Internal Revenue Service is working on new rules that could
require paid tax preparers to be licensed to improve tax compliance and
reduce fraud, IRS Commissioner Doug Shulman said Thursday.
Eighty percent of taxpayers get help with their returns, either from
paid preparers or computer programs, Mr. Shulman told a congressional
subcommittee. Tax preparers currently don't have to be licensed, unless
they represent clients in proceedings before the IRS.
Mr. Shulman said he wants better leverage to make sure tax preparers
act ethically, not only to improve enforcement, but also to ensure that
taxpayers get quality help in preparing their returns.
"Paying taxes is one of the largest financial transactions
individual Americans have each year, and we need to make sure that
professionals who serve them are ethical and ensure the right amount of
tax is paid,'' Mr. Shulman told the House Ways and Means Subcommittee
on Oversight.
Mr. Shulman said the IRS will submit recommendations by the end of
the year to U.S. Treasury Secretary Timothy Geithner, which could
include regulatory or legislative changes.
The changes could affect chain tax-preparation companies, including H&R Block Inc., Jackson Hewitt Tax Service Inc. and Liberty Tax Service.
In addition to enrolled agents, lawyers and accountants—who are
licensed to represent taxpayers before the IRS--the recommendations
would cover a growing category of unlicensed tax preparers, according
to an IRS news release.
While the IRS will consider the role of tax-software providers,
human preparers are the focus of the effort to craft stricter
standards, Mr. Shulman told reporters in a conference call. "In most
states, anyone can charge to prepare tax returns, regardless of
training, education, experience, skill, licensing or registration," he
said.
Registering tax preparers and requiring a minimum competency makes
sense, said Paul Cinquemani, director of government relations for the
National Association of Tax Professionals.
"As complex as the tax law is, believe me it doesn't hurt to raise
the bar,'' Mr. Cinquemani told the Associated Press. "I don't
understand how anyone operates without getting education to stay on top
of tax law. It's very complex.''
"I applaud the IRS in their efforts to require tax-preparer
certification," said John Hewitt, chief executive of Liberty Tax
Services, the third-largest U.S. tax-preparation firm. "It certainly
hasn't hindered us in Oregon and California," he said of two states
that regulate tax preparers.
H&R Block, the largest tax-preparation firm, also said it welcomed the IRS announcement.
Scott Schneeberger, an analyst with investment firm Oppenheimer
& Co. Inc., wrote in a Thursday research note that the IRS
initiative is "significantly positive" for the big tax-preparation
firms.
"As the larger preparers are already more closely monitored than the
large, highly fragmented population of mom & pop preparers, the
larger companies have been seeking increased regulation and oversight
of the broader industry," Mr. Schneeberger wrote.
Rep. John Lewis (D., Ga.) said low-income taxpayers are often taken
advantage of by "fly-by-night'' tax preparers who set up shop in
storefronts, only to go out of business after tax season. "If they have
problems, they cannot be located,'' said Mr. Lewis, who is chairman of
the oversight subcommittee. "We're going to find a way to deal with
it.''
In 2006, the Government Accountability Office found errors in an
investigation of chain tax preparers. Out of 19 visits where GAO
investigators posed as taxpayers, five preparers' work resulted in
incorrect refunds of about $2,000, while errors in two cases cost the
taxpayers $1,500.
From 2006 through 2008, the IRS initiated more than 600
investigations of fraud among tax preparers. During that time, 356 tax
preparers were convicted, with more than 80% of them sentenced to
prison, home confinement or electronic monitoring.
But when the IRS detects a fraudulent return, it's the taxpayer--not
the tax preparer--who must pay the additional taxes, interest and any
penalties, according to the IRS.
