California's registered domestic partners are sailing in uncharted territory this tax season. For the first time, a state law requires them to file their taxes as married couples, even though federal tax laws don't recognize such unions.
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HOW WE FILE: BY THE NUMBERS
140 million: Individual federal tax returns in 2007
57 percent: Returns filed electronically
72 percent: E-filed returns prepared by tax professional
28 percent: Self-prepared e-filed returns
76 percent: Returns with refunds
58 percent: Refunds sent via direct deposit
$2,324: Average refund
SOURCE: Internal Revenue Service, compiled by the San Jose Mercury News
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On a practical level, the new law will double the filing workload because partners essentially must do their taxes twice: once as a married couple under California rules, then as separate taxpayers on their federal returns.
The collision between state and federal rules also has created a snarl of tax issues that are confounding taxpayers, professional preparers, academics and even the tax agencies.
“There are so many issues that come up ... where there really is no answer,” said Kathleen Wright, director of the graduate tax program at California State University Fullerton. “There is so much gray area and complexity.”
The problem has been building for years. In 1999, California became the first state to create a registry for domestic partners, which consists of same-sex couples and unmarried heterosexual couples with at least one partner older than age 62. Later laws gave registered partners many of the rights and responsibilities of married couples. Until now they've been treated as single in filing state and federal tax returns.
Rich Waterman, a partner with Sparkman and Waterman Accounting in San Jose, said puzzled partners have kept his phone “ringing nonstop.”
“There's a lot of anxiety that they're just going to do it wrong,” Waterman said. “Even with tax professionals, there's the fear that something will not be right.”
From the outset, partners face flummoxing questions. Are they registered with the secretary of state or a municipality? Do these rules apply if they've broken up but failed to properly dissolve their partnership? Must nonresident couples who are registered in other states file married returns if they own property in California or earn income here?
Then comes a practical question: Are they better off filing jointly or separately?
The answer to that is likely to start with the rules mapped out in Publication 737, a 17-page booklet that wasn't finalized until mid-December. Then comes a 38-line work sheet to calculate what a couple's federal income would be if Uncle Sam treated them as a married couple.
Waterman thinks it will be easier if couples start out doing what they've done in previous years: Fill out their federal 1040s as single taxpayers. Next, concoct a hypothetical 1040 as if they were married and were allowed to file joint or separate returns. This fake return will provide the jumping-off spot to calculate their California taxes as a married couple.
In the end, the state estimates that 59 percent of domestic partners will owe less state income tax, while 12 percent will owe more. The rest will see little change.
