Authored by: Michael C. Levy, Esq.
The Internal Revenue Service recently issued a private letter ruling that, for the first time, acknowledges the rights of same-sex couples to combine their income and property for tax purposes. The IRS ruling held that a same sex couple who were registered domestic partners under the California Domestic Partnership statute are required to report one-half of the couple’s combined income, both from performance of personal services and their community property, on their federal tax returns. Additionally, the IRS held that each partner was entitled to half the income tax withholding credits for himself and his partner. Finally, because California recognizes their relationship as a legally protected union, there would be no federal gift tax due based on the attribution of one partner’s income to the other for tax purposes.
It is important to acknowledge both the significance and limitation of this decision. The Federal Defense of Marriage Act, passed in 1996, has prohibited federal agencies from recognizing unions other than the traditional defined marital unit of a man and a woman. While this ruling does not change this prohibition, it does provide certain federal tax benefits and obligations to certain same sex couples that did not exist before. Furthermore, because the IRS acknowledged that federal tax law will respect the decisions of state property law, there may be additional room to expand upon the rights afforded to same sex couples through legislation at the state level.
However, contrary to some accounts of the decision, a large inequality still exists for same sex couples with regard to federal taxation. First, the DOMA Act still prohibits same sex couples from filing a joint tax return. Second, the estate and gift tax advantages afforded to married couples remain unavailable to same sex couples. These include the estate tax marital deduction and the ability of married couples to make larger gifts through the use of gift splitting.
Finally, for states that do no have a comparable statute to the California domestic partnership law, the basic rights of passing property by state intestacy statutes remains unavailable. Until such equality is achieved, it will remain imperative that same sex couples have a properly drafted and implemented estate plan in place that protects their families and assets.