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IRS says California RDPs should split wages on tax returns

The IRS Chief Counsel’s Office has issued updated guidance, Chief Counsel Advice (CCA) 201021050, for reporting earned income of California registered domestic partners (RDPs).

According to the ruling, the federal government recognizes community property rights of California registered domestic partners effective January 1, 2007. Therefore, one-half of the earned income of a partner should be reported on each partner’s federal income tax return, unless the RDPs execute an agreement opting out of community property treatment.

Registered domestic partners still can’t file joint federal income tax returns.

This new reporting requirement should be followed for income tax returns filed after the ruling was issued on May 5, 2010. Taxpayers may optionally amend income tax returns filed for tax years 2007 through 2009 to follow the new ruling.

This ruling changes previous advice issued in CCA 200608038 on February 24, 2006. In the earlier ruling, the IRS said each RDP should report his or her own earned income, disregarding community property rights. The reason is on September 26, 2006, California enacted Senate Bill 1827, which repealed language in the California Domestic Partner Rights and Responsibilities Act of 2003 that said “earned income may not be treated as community property for state income tax purposes.”

This is a tremendous validation of community property rights for California same sex couples and other registered domestic partners, and could result in significant tax savings for some of them. On the other hand, the ruling adds an element of complexity for tax return preparers and the IRS because income reported on an information return, such as a Form W-2, under one person’s social security number will be reported on two income tax returns.

Tax and financial advice from the Silicon Valley expert.