As reported by the Wall Street Journal, the IRS, in a private letter ruling, has held that community property between same-sex partners or spouses will be recognized.  In the ruling, income earned by California registered domestic partners will be treated as community property for federal income tax purposes.  In practical terms, it means the following: (1) registered domestic partners must continue to file separate "single" federal returns; (2) each partner will report 1/2 of the "community income," i.e., 1/2 of their own income and 1/2 of their partner's income; (3) the partners must file joint state income tax returns.  This reverses the position the IRS took in a similar private letter ruling in 2006 when it held that California registered domestic partners should only report their own income on their respective federal returns.  Although not addressed in the ruling, it can now be presumed that 1/2 of the deductible expenses (mortgage interest) should be deducted from each return.  Also, the IRS held that treating both partners' incomes as community property does not have any federal gift tax implications. 

This new ruling will likely result in lower federal taxes for couples where the income of the respective partners is not relatively equal (i.e., one partner makes a lot, one makes a little).  It may increase taxes for lower earning partners who had previously qualified for credits or deductions that phase out at certain AGI thresholds.  Although not carrying the legal authority of a public ruling, a private letter ruling gives valuable insight to how the IRS will treat a particular factual situation on an ongoing basis. 

As reported by the Wall Street Journal, the IRS, in a private letter ruling, has held that community property between same-sex partners or spouses will be recognized.  In the ruling, income earned by California registered domestic partners will be treated as community property for federal income tax purposes.  In practical terms, it means the following: (1) registered domestic partners must continue to file separate "single" federal returns; (2) each partner will report 1/2 of the "community income," i.e., 1/2 of their own income and 1/2 of their partner's income; (3) the partners must file joint state income tax returns.  This reverses the position the IRS took in a similar private letter ruling in 2006 when it held that California registered domestic partners should only report their own income on their respective federal returns.  Although not addressed in the ruling, it can now be presumed that 1/2 of the deductible expenses (mortgage interest) should be deducted from each return.  Also, the IRS held that treating both partners' incomes as community property does not have any federal gift tax implications. 

This new ruling will likely result in lower federal taxes for couples where the income of the respective partners is not relatively equal (i.e., one partner makes a lot, one makes a little).  It may increase taxes for lower earning partners who had previously qualified for credits or deductions that phase out at certain AGI thresholds.  Although not carrying the legal authority of a public ruling, a private letter ruling gives valuable insight to how the IRS will treat a particular factual situation on an ongoing basis.