Community Vs. Separate Deductions

Any deductions associated with separate income are also separate deductions. For example, the self-employment tax deduction mentioned earlier is a separate deduction since only the spouse who owns the business pays the self-employment taxes that are being deducted. Similarly, expenses related to producing community income or expenses related to community property are split evenly between both returns.

Here are some details on common deductions:

• Charitable contributions: Whether this is a separate deduction or a community deduction depends upon the source of the funds or property donated. If community funds were donated it is a community deduction and is split evenly. If separate funds or property was donated it is a separate deduction and taken in full by the owner of the funds/property.
• Deduction for traditional IRAs: IRAs are considered separate property by the IRS. Therefore, similar to any income from IRAs, deductions related to IRA contributions are also separate deductions. When determining if you are eligible to deduct IRA contributions, you would base it upon your separate earned income only.
• Deductions for mortgage interest and property taxes: The allocation of real estate deductions depends upon whether the underlying real estate is community property. If the real estate is community property, then the mortgage interest and property tax deductions would be split evenly. If the real estate is owned separately, then the spouse who owns the property would take the full interest and property tax deductions on their separate return.

• Medical expenses: Other personal deductions for medical expenses, college tuition, moving, etc. are deductive to the spouse who actually incurred the expense. However, the spouse must pay these expenses out of their own separate funds. If the expense is paid with community funds it would have to be split evenly between both spouses returns.

When Are These Rules Effective?

These new rules go into effect for tax years after June 1, 2010. Since most individuals are calendar year filers, this will affect most people’s 2011 tax returns.

California applied community property rules to RDPs for state income tax purposes on January 1, 2007. Due to this, the IRS is allowing California RDPs to amend their federal tax returns, if they choose to, for calendar years 2007, 2008, and 2009. It’s a good idea to consult with a CPA or Enrolled Agent to determine if it would be beneficial to amend your returns.

Opting Out of Community Property Rules

Couples can opt out of community property rules if they enter into a written agreement that dictates whether property will be considered community or separate. There is a possibility that these types of agreements could result in a federal gift tax liability if they concern current property as opposed to future property. You should consult with a tax attorney experienced in this area if you are considering this type of agreement or other tax planning to avoid community property reporting rules. There could be other legal ramifications of this type of agreement, especially in the event of divorce or separation, so a tax attorney is the best person to give advice in this area.

More details about preparing separate returns using community property rules.

 

Source: Lambda Legal, “The IRS Applies 'Income-Splitting' to California's Registered Domestic Partners and Same-Sex Spouses” .