Five States and the
District of Columbia
Now Allow Domestic
Partners to File Joint Returns
Press Release:
DOMESTIC PARNERRS, TAXES
www.eathtimes.org
March 18, 2008
(Business Wire) Same-sex
couples in Connecticut, Massachusetts and Vermont have been allowed to file
joint returns in previous years, but this spring sees the first joint returns
for domestic partners and civil union members in California, the District of
Columbia and New Jersey. (In California, unmarried cohabiting heterosexual
couples, of which at least one person is 62 or older, may also register as
domestic partners and file joint state tax returns.)
In the be-careful-what-you-ask-for realm, many gay and lesbian couples may be
kicking themselves for their efforts to win the right to file joint state income
tax returns. As couples work on completing 2007 tax returns, more are
discovering what a mess it can be when the federal government and the states
have starkly different rules.
Since state tax returns rely on computations from a joint federal return, and
domestic partners are not permitted to file one, these couples must basically
complete a total of four tax returns:
* First, each partner must complete an individual federal Form 1040 (or 1040-A
or 1040-EZ) to file with the IRS;
* Then the couple must create a mock or dummy joint federal return combining
income, adjustments, deductions and credits;
* Finally, they use that mock return as the jumping off point to prepare a joint
state tax return.
Tricky areas abound
As complicated as that sounds, it’s even more complex because of the many ways
in which federal tax law treats individual taxpayers and married taxpayers
differently. You can’t simply combine the numbers from your individual
returns for that dummy joint federal return.
For an idea of the kinds of mine fields you might have to traverse, consider:
* Capital gains and losses. On individual federal returns, each
partner’s gains and losses are netted separately. Let’s say Pat has
$20,000 of net long-term gain and Chris has $20,000 of net long-term losses.
On individual federal returns, Pat would owe tax on $20,000 of gain. Chris
would get to deduct $3,000 of loss against other income (the maximum deduction
in any one year). On a mock joint return, however, Chris’s loss would
offset Pat’s gain and no tax would be due (and that’s what would carry over to
the real state joint return). Let’s say, however, that both Pat and Chris
suffered losses in 2007. On individual returns, each would be allowed to
deduct up to $3,000 against other income. On the joint return, however,
they would be limited to a single $3,000 loss.
Understanding Capital Gain and Losses
* Real estate losses. Federal law allows taxpayers (either married
or single) with incomes under certain thresholds to deduct up to $25,000 of
passive real estate losses. Let’s say Pat and Chris each took a drubbing
in real estate in 2007 and each suffered $25,000 of qualifying losses. On
their individual federal returns, each could deduct $25,000. But on a mock
joint return only a single $25,000 loss would be allowed.
Home Ownership Tax Deductions
* Mortgage interest deduction. On a federal return, a homeowner --
whether married or single -- can deduct interest on up to $1 million of debt
used to buy a home and up to $100,000 of additional debt secured by a home used
for any other purpose. If Pat and Chris each have $750,000 of qualifying
debt, they can each deduct all of the interest on individual federal returns.
On a dummy joint return, however, the write-off would be crimped by the $1
million and $100,000 limits.
* Miscellaneous expenses. This category of itemized deductions
includes things like the cost of investment and tax advice and unreimbursed
employee expenses. And, you get a deduction here only to the extent that
the total of qualifying expense exceeds 2% of your adjusted gross income (AGI).
By combining both partner’s income and expenses on a fantasy joint return, the
write-off might be bigger -- or smaller -- than the combination of two
individual returns.
Miscellaneous Deductions
* Roth IRA. This is the most mind-boggling anomaly we’ve come
across. Under federal law, the right to contribute to a Roth IRA for 2007
is phased out as AGI rises from $99,000 to $114,000 on a single return and from
$156,000 to $166,000 on a joint return. If Pat and Chris each have $90,000
of AGI, each can contribute $4,000 to a Roth for 2007. But on a joint
return, the combined income of $180,000 prohibits the contribution.
Investment and Retirement Savings
Win or lose?
A big question, of course, is whether filing a joint return on the state level
will save or cost you money. A study by California’s tax agency found that
about 60% of registered domestic partners will save an average of nearly $500 by
filing jointly, for example, about 12% will pay more (averaging about $750) and
the rest will basically pay the same as if they continued filing as single
taxpayers.
For most states, however, married-filing-separately often pays off in a lower
tax bill. So, you’ll probably want to tackle another extra tax form:
the equivalent of married-filing separately. It might save you money.
And, if you’re using software, like TurboTax, it shouldn’t be too onerous.
Online Resources: Be sure you understand the rules in your state.
Here are the web sites for your state’s tax department.
--
California Franchise Tax Board
--
Connecticut Department of Services
--
District of Columbia Taxpayer Service Center
--
Massachusetts Department of Revenue
--
New Jersey Taxation
--
Vermont Department of Taxes
Trylon SMR
Chris Spagnuolo/Craig Sender 212-725-2295
chris@trylonsmr.com /
craig@trylonsmr.com
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