First year of Registered Domestic Partnership in Community Property state

Forum|Forum|3 years ago
January 24, 2023
3 replies
0 views

This question has been asked a number of times but never answered clearly. I entered a Registered Domestic Partnership on May 1. We are in a community property state (CA). We have fully mingled finances and have been mingled since before the RDP began. There are at least three ways I could imagine needing to classify our income/withholding (NOTE: this question is only about how to handle this first year, where we were not in an RDP all year; it is clear how to do this for subsequent years):

1) Easy: since we were in a RDP on 12/31, all income/withholding can be considered community property

2) Not too hard: Pro-rate it. Since we were single for 4 months and RDP for 8 months of the year, 1/4 of all income/withholding is separate property and 3/4 is community property to be divided 50-50

3) Very onerous: the precise amount of income/interest/dividends from the first 4 months must be determined and considered separate property and all the rest is community property. This would involve combing through monthly statements and paystubs.

Is (1) or (2) acceptable? Is it at our discretion which one to choose?

Please no answers with links to https://turbotax.intuit.com/tax-tips/marriage/five-tax-tips-for-community-property-states/L4jG7cq7Z or https://www.irs.gov/pub/irs-pdf/p555.pdf The answer to this question is NOT there.

Not A Product Question

Best answer by DaveF1006

Yes, if were in the RDP for part of the year, you will need to allocate your income for the entire year thus all income is community property income.

As far as qualified dividends, if the amount is less than $41,676, the capital gains rate is 0 thus there is nothing to allocate. If more than $41,676 and less than $459,000, the rate is 15%. You would need to determine the capital gain on qualified dividends. So if your combined qualified dividends is $100K, this means you will allocate that amount 50/50. Your capital gain you will allocate is $15,000, thus you will report $7500 capital gain in your 8958 and your partner will report $7500 in theirs as well. The $15,000 is determined by $100 X.15 =$15,000.

If your situation does not follow within the parameters of my advice, please reach out and we will clarify this to your satisfaction We are here to help.

@5153928

AliciaP1

The correct answer is #1 on your list but only gets split if you are filing with the Married/RDP filing separately status for your CA return. You are eligible to file Married/RDP filing jointly if you would rather file that way. Since you are not legally married, you can only file Single or Head of Household, whichever applies, for your Federal return. You will then need to mark that your state return is being filed with a different filing status than your federal return.

See Registered domestic partner (RDP) for more specifics on the filing statuses on CA returns.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

A

Anonymous

Right, I know we have to each file Single for federal returns, and CA state return is relatively easy because we are "normally married" according to CA. The question is the allocation of community vs separate property as it pertains to our separate Single federal returns (i.e. for Form 8958). Are you saying (1) is also the correct answer for that?

AliciaP1

For your federal returns, you need to each report your own forms (W-2, 1099-NEC, 1099-MISC, etc) as they were issued.

If you have a form issued to both of your names, you will report that according to the social security number shown as the payee/payer on the form. For instance, if you have a joint savings account and are issued a 1099-INT with both names but your (not your partner's) SSN on it, you will report the income and your partner will not.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

A

Anonymous

That makes sense that the W2 aren't altered. I'm looking at steps 5 and 6 of Part I here: https://ttlc.intuit.com/turbotax-support/en-us/help-article/taxation/prepare-rdp-return-live-california-nevada-state/L4VNsnTGJ_US_en_US

To figure out how much to adjust my income, I need to determine my "share of the community property". Is all of both our incomes for the year community property or do we need to pro-rate it by the period of the year where we were actually RDPs? It sounds like you are saying we don't need to pro-rate and all income for the year is community property, correct?

Relatedly, how do we allocate qualified dividend income between the two of us on the Community Property Income Adjustments page? This box seems to just adjust our income which is fine for W2 and interest income but qualified dividend income should be at the capital gains rate.

DaveF1006Answer

Yes, if were in the RDP for part of the year, you will need to allocate your income for the entire year thus all income is community property income.

As far as qualified dividends, if the amount is less than $41,676, the capital gains rate is 0 thus there is nothing to allocate. If more than $41,676 and less than $459,000, the rate is 15%. You would need to determine the capital gain on qualified dividends. So if your combined qualified dividends is $100K, this means you will allocate that amount 50/50. Your capital gain you will allocate is $15,000, thus you will report $7500 capital gain in your 8958 and your partner will report $7500 in theirs as well. The $15,000 is determined by $100 X.15 =$15,000.

If your situation does not follow within the parameters of my advice, please reach out and we will clarify this to your satisfaction We are here to help.

@5153928

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

AmyC

Employee

Form 8960, line 7 would be the only good place to subtract the investment income, if you need to subtract it. Medicare tax is based on earnings. The NIIT is investment based. The question becomes who owns the investment income to determine if the investment income is split. Refer to your state law as it varies.

You are clearly aware of IRS pub 555 and its section on RDP which states:

The expenses for separate business or investment income is deductible by the RDP who earns the income.

If the income is split, so are the taxes, which would include NIIT. See pub 555 for relief from tax liability which states:

Relief from liability for tax attributable to an item of community income.

You aren't responsible for the tax relating to an omitted item of community income if all the following conditions are met.

You didn't file a joint return for the tax year.
You didn't include the item of community income in gross income.
The item of community income you didn't include in your gross income is one of the following.
1. Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee.
2. Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor.
3. Your spouse's (or former spouse's) distributive share of partnership income.
4. Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Use the appropriate community property law to determine what is separate property.
5. Any other income that belongs to your spouse (or former spouse) under community property law.
You establish that you didn't know of, and had no reason to know of, that community income.
Under all facts and circumstances, it wouldn't be fair to include the item of community income in your gross income.