Aug 24, 2007
V 35 Issue 34

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Registered California Gay couples face messy tax season
Registered California Gay couples face messy tax season
Franchise Tax Board scrambles to resolve issues

by Rex Wockner - SGN Contributing Writer

Gay couples registered under California's domestic-partner law will be required to file their state income taxes as a married couple April 15.

There's just one problem: The Franchise Tax Board hasn't figured out how to make that work.

Since the federal government doesn't recognize Gay couples in any way - be they married or domestically partnered - such couples have to file their federal taxes singly, as unmarried.

Then turn around and file in California as married.

But how does one do that, given that the first number you put on your state income tax form is a dollar amount from your federal return?

"The confusion caused by both having a two-tiered system in California [marriage and registered partnership] and inequality at the federal level can be pretty sloppy," said Brian Chase, a Los Angeles-based senior staff attorney for Lambda Legal.

The Franchise Tax Board is scrambling to figure out a solution, said John Barrett, a public-affairs spokesman for the agency.

"This is going to be quite an interesting year," he said.

One fix under consideration is for registered California couples to do their federal income taxes three times - their two real returns, and then a third, fake return, as a married couple. They could then use a number from the fake return to be gin their joint state return.

Barrett noted that the Franchise Tax Board prefers to call the proposed fake federal return a "pro forma return."

But the agency hasn't decided that's the way to go. And, besides, it creates problems of its own.

Many Californians are required to attach a copy of their federal return to their state return. But what would you attach? Your two real federal returns, or your joint fake federal return? Or all three, perhaps?

"Therein lies the debate," Barrett said. "Do you attach both, do you attach the dummy return? Some folks are saying yes and some are saying no."

Another option under consideration by the Franchise Tax Board is to create some kind of worksheet - a new California tax form - that registered couples would use to merge information from their separate federal returns and create the magic number with which to begin their joint state return.

"I believe they're going to go with the worksheet route," predicted Alice Kessler, government-affairs director for Equality California, the statewide LGBT lobby group. "Based on my conversations with most practitioners, that seems to be a good option."

A third option - which will be mandatory if no California laws are changed before Jan. 1 - is to add the adjusted gross incomes from the separate federal returns and just use that number to begin filling out the California married return.

But the FTB is leaning against this option because some registered partners would unfairly pay more taxes this way than they would under other approaches.

"We need to resolve this issue soon because the software developers need time to develop their products and the tax professional community will need time to meet with their clients affected by this," said Barrett.

But Lambda's Chase isn't convinced tax-software companies are going to be of much help regardless.

"It doesn't look like any of the major software companies will be supporting this for registered partners next year," Chase said. That ought to be fun - for people who do their own taxes and for tax professionals, both of whom have become accustomed to putting numbers into a computer and letting the machine do the hard work.

Chase said he, too, believes the Franchise Tax Board is "working very hard to craft a [reconciliation] worksheet that would be very functional and easy for couples to fill out."

But he doesn't consider that an ideal solution.

"Preparing a worksheet or a schedule might be simpler than redoing your federal taxes, but it's not necessarily going to provide as accurate of an adjusted gross income," Chase said. "There are so many factors that go into a federal tax return that capturing that in a worksheet is very difficult.

"The Franchise Tax Board has been working with people in the field and with some activists to try to do the best job on it that they can."

A bill is pending in the California Legislature (SB 105) that attempts to resolve some of this mess and also provide protection from penalties and interest for registered partners who get so confused that they botch their state return.

The measure passed the Senate and is pending in the Assembly, where it is facing some amendments.

"We have identified the key issues that need to be addressed, and SB 105 is going to clean up those areas that would otherwise present an administrative hurdle for the FTB," said EQCA's Kessler.

She said such areas include "how to calculate adjusted gross income" and "provisions ... where treating domestic partners as spouses would result in a disqualification of certain federal tax plans."

Kessler cited as examples education savings accounts, retirement accounts, medical-expense accounts and other areas where the Internal Revenue Service grants special status to certain income that is routed in a specific direction.

"SB 105 would add an exception to the [California] rule that you treat registered domestic partners as spouses - for the purpose of federally qualified tax-favored accounts - and prevent the partners from being penalized," she said. "We don't want anyone to lose a certain benefit because the federal government isn't recognizing our status."

Kessler said that "sometimes there's a price to be paid in achieving equality - and that's what we're seeing with these differences in federal and state tax law. ... It's yet another reason why we continue to fight for marriage equality."

If California legalized same-sex marriage, she said, "we'd then have standing to challenge ... the feds to recognize the tax status of married Californians. Right now we don't have that status because we only have domestic partnership."

Meanwhile, there is some good news in all this. A registered Gay or Lesbian couple with two kids, with one parent making the median California income of $67,000 and the other parent staying home with the kids, will save about $2,000 in state income taxes by filing jointly next April, according to EQCA's number-crunching.

"The larger the discrepancy in earnings [between the partners], the more they'll save," Kessler said. "The tax system is designed so it tends to benefit families and those with children. There's something inherent in our tax system that promotes families."

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