Dealing with same-sex couples' taxes in community-property states: Could it be any more Byzantine?
October 6, 2011 11:34 PM   Subscribe

You are not my tax advisor, but... We're a same-sex married couple in California, trying to make heads or tails out of the (confusing) IRS tax-filing pickle that is in effect for the 2010 tax year. We have to combine our community income, split it in two, add any individual income to the respective partner's form, and then create two separate forms for the IRS for each of us, but check the "single" category for filing status. Here's the dilemma: He gets a W2 (salaried employee). I freelance (several 1099s and a Schedule C). Do I have to duplicate the entire Schedule C across both forms, and put half of each deduction on my form and half on his? :-0 Or do I do the full deductions on my form and fill in something on the adjustment line (line 21, I think it is) on his 1040 form as a way of evening out the reporting?

Some background: In an effort to comply with state law yet still avoid conflict with DOMA (the federal government's law banning federal recognition of same-sex marriage, domestic partnerships, or civil unions), the IRS last year said it would respect the community-property provisions of California, Nevada, and Washington state law, much as it does for opposite-sex couples. So all of those couples now have to file essentially the same as an opposite-sex married couple filing separately in a community property state, yet file jointly for their state taxes. Has your head stopped spinning yet?

Intuit finally released an update to TurboTax in July that was supposed to help us (after admitting earlier in the year that they needed more time, since the ruling only came down in February; yes, we filed an extension). But the update really didn't help that much; it said that we were to prepare a spreadsheet, or worksheet, outlining each person's income, whether or not it was community or individual income, and tallying up which parts get divided in half. Then we report the requisite amounts on each person's 1040 form. And then, when the federal forms are done, we combine everything together into a fake new federal form, which the IRS never sees, and fill that out as if we were filing jointly... because that fake form them becomes the basis for the California Form 540 we send to Sacramento.

So far, I have scoured the web and have yet to find an adequate answer for this question. Yes, I could create two separate Schedule Cs and chop in half each and every deduction for expenses, and the like, but that sure seems like a mighty big hassle. There has to be an easier way than that to equitably split and report the income without creating exactly double or triple the paperwork, right?

(Yes, cue the obligatory "You're dealing with the government; what makes you think they'll make it easy?" riposte from the peanut gallery. Duly noted.) :-)

To add insult to injury, there's the whole issue of self-employment taxes this time around, where it appears the IRS demands that we split that up as well, which they wouldn't do with straight married couples, because spouses are exempt from community-property splitting with regards to self-employment taxes; the person managing the business gets the credit for the self-employment taxes. But guess what? Since we are not considered actual spouses in the IRS' eyes (thanks to DOMA), we have to split that in half, meaning that I'd only get credit for half of my self-employment taxes. Arrgh. And then my husband would pay self-employment tax, which would be credited to his Social Security account. This may not be much of an issue if our marriage were recognized by the feds, and hopefully it will in 20 or so years when we retire, but still... it sure is inequitable, eh?

If anyone else has been through this morass this year and lived to tell the tale in regards to my question about Schedule C, I'd love to hear what you did.
posted by kentk to Law & Government (7 answers total) 1 user marked this as a favorite
If you want to avoid trouble, talk to a GLBT-friendly tax preparer in your area. They ought to have a better idea of the answer, and you are more protected if they are wrong.
posted by GenjiandProust at 2:54 AM on October 7, 2011

Yeah, just get yourself an accountant. The cost to you of getting this wrong has the potential to be way, way higher than just paying someone to get it right the first time.
posted by valkyryn at 3:39 AM on October 7, 2011 [1 favorite]

Try calling the IRS.
posted by monstrouspudding at 4:54 AM on October 7, 2011

In New York, there are tax attorneys and accountants who specialized in gay couples just because this is SO confusing. Likely there are TONS of these in California.

The other answer is: just because the IRS will respect some limited aspects of your marriage, the IRS does NOT require this, as I think I understand from my reading and from talking to my gay-marriage-informed accountant. As it prohibits you, still, from filing as a married couple, it does not require you to recognize community property that it does not recognize. (AS I UNDERSTAND IT; I am REALLY not an accountant.)

But yeah, the difference in your state v federal taxes is insane making. There is no WAY I will attempt to do this myself. (At least, not without living in a state with no state or city tax filings. Heh.)
posted by RJ Reynolds at 8:13 AM on October 7, 2011

My RDP and I did the duplicate Schedule C in each of our returns, as you described. Got our refunds with nary a peep from the IRS.

My personal take is that even the IRS doesn't really know the "right" way to handle this stuff yet, so they're not going to bring the hammer down if you've made a good-faith effort to account for all your income. So I wouldn't stress out too much. Then again, I'm the sort of person who enjoys reading IRS publications to figure this stuff out, and if you're not, a tax preparer might be in order.

RJ Reynolds, my understanding is that the community property splitting is mandatory for same-sex couples, just as it is for opposite-sex couples filing separately. Only the retroactivity of the ruling to 2008 was optional.
posted by Sxyzzx at 3:17 PM on October 7, 2011

I am right there with you on this one -- this is why I filed for an extension and thus have to do my taxes this weekend.

One of the fucked up things about this is that yes, you MUST file as community property and no, you MUST NOT file as married. It's not optional. Community property is determined at the state level, so the IRS requires that you comply with it. Filing for the state was relatively easy -- yes, you're married, and you're community property.

I am opting for the double paperwork route, which for you would be 2 Schedule Cs, and using TurboTax. I had been hoping that their new improved software would actually do that work, but sadly it does not. I am hopeful that for next year TurboTax will have sorted this out. I appreciate that they're even making an effort, but I want the software to do all these calculations instead of having to ALSO enter all the date in my own spreadsheet just to divide it in half.
posted by gingerbeer at 3:49 PM on October 7, 2011

Response by poster: Thanks for the responses. It's been delightfully hair-raising this week... I finally got TurboTax to show me the Community Property Adjustments screen, so that I can put in half of my partner's W-2 and subtract half of my 1099s... I think I've done that right. But if I do that, then it would appear that my Schedule C would have the wrong info, as it would start out with double the amount of income, thanks to me entering my complete 1099s.

I've been advised that all 1099s and W-2s should be entered as they were issued on the correct partner's form, and to just use the income adjustment feature on the other partner's form to get them to coincide. But starting out with the higher income figure on Schedule C on my form would mean that the program would miscalculate the self-employment tax, since it would see a higher profit from the business, not to mention the fact that the self-employment tax should be split in half between the two returns, which TurboTax doesn't know about.

Arrrgh. For those who've done the dual-Schedule C route, how did you handle this? Or are you still as perplexed as I am?
posted by kentk at 12:34 AM on October 14, 2011

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