November 10, 2010

IRS to Follow State Law on Domestic Partner Income

IRS to Follow State Law on Domestic Partner Income Tax & Business

In a recent private letter ruling (PLR), IRS has ruled on a variety of issues flowing from California having extended full community property treatment to registered domestic partners. Registered domestic partners must each report on their individual federal income tax return one-half of their combined income from the performance of personal services and from their community property assets. Each partner is entitled to half of the credits for income tax withholding from his (or her) own wages and from his (or her) partner’s wages. The vesting of income under the community property laws does not trigger gift tax consequences. IRS also concluded that the assets of a taxpayer’s registered domestic partner in California can be considered by IRS in determining the reasonable collection potential of a taxpayer’s offer in compromise (OIC).

This new ruling could reduce federal taxes for some domestic partners, especially if one has a very large income and the other has little or none. Alternatively, the new ruling could also hurt some domestic partners, especially if one partner qualifies for varying low income tax credits.

This new ruling also allows registered domestic partners to go back and amend their individual federal tax returns beginning on January 1, 2007.

If you like to learn more about this new tax provision, please contact Sandra Van Keuren, CPA, MST, at 925-627-3306 or [email protected], or your principal contact at Marcum LLP.

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