New IRS Rules Require Same-Sex Couples To Split Income, Could Yield Savings

The Sacramento Bee’s Claudia Buck is reporting that same-sex couples in three separate states — California, Nevada and Washington — can now “divide their combined income equally and report it on their separate tax returns,” and in some instances, push themselves into a lower tax bracket and pay less taxes. According to the new rule, the IRS will treat community property earned by same-sex couples in the same way that it treats community property earned by married different-sex couples who file separate federal tax returns: add together all the community income earned by both members of the couple and to allocate half to each one’s separate return.

Those who will save the most are same-sex couples with the biggest disparities in income. For instance, a couple where one earns $100,000 and the other is a stay-at-home spouse with little or no income, will split their combined community earnings on their individual tax returns, with each reporting $50,000 in income. The result: an overall lower tax bill for both.

In an example cited by Lambda officials, a hypothetical couple where “David” is an attorney earning $225,000 and “Richard” a librarian with $20,000 in income, will see a combined savings of $6,824 in taxes.

But since the 1996 Defense Of Marriage Act prohibits the federal government from recognizing same-sex marriages and same-sex spouses must continue to file separate federal income tax returns.

In fact, the new income splitting requirement may even add more complexity to gay couples filing their tax returns and could increase the costs of filing a return over the short-term. One CPA contacted by the paper estimates that “the new income-splitting requirements could take twice as long to prepare.” “We have to go through every single item of income and determine if it’s community property or separate property. Then you have to do the same with expenses and deductions. If there’s a prenup (prenuptial agreement), that has to be taken into account. Then you develop a IRS worksheet that has to be attached and show how you split everything up,” because the reported income won’t match what’s on an employer’s W-2 statement.