Registered Domestic Partner Planning

by April C. Ball, Esq.

The beginning of fall signals the beginning of year-end tax planning for individuals and businesses. This year, getting an early start to Registered Domestic Partner planning is more critical than ever. Why? As of 2007, the law in California changed for Registered Domestic Partner tax return filing. This, in turn, will affect what type of returns Registered Domestic Partners file in California on April 15, 2008.

New California Tax Return Filing Status

On September 29, 2006, Governor Arnold Schwarzenegger signed California Senate Bill 1827, the “State Income Tax Equity Act” into law, effective as of January 1, 2007. SB 1827 was designed to create equality within the state concerning tax return filings. However, in doing so it may also create additional paperwork for Registered Domestic Partners.

SB 1827 amended the California law (taxation and family codes) to provide Registered Domestic Partners with the same rights and responsibilities of married couples within the state of California. This, in turn, extended the requirement of filing a joint income tax return – namely, a “married filing joint” or “married filing separate” for California purposes. In some cases, a person may qualify in California for “head of household” filing status.

Therefore, as of the 2007 tax year, Registered Domestic Partners must begin filing joint tax returns. This may help Registered Domestic Partners that would benefit from combining their deductions, but where both Registered Domestic Partners are wage earners, their combined incomes may place them into a higher tax bracket. Thus, advanced planning is key. It is important to speak with your tax professional to see whether you should currently update California withholding allowances to take your joint filing status into account.

Adding a layer of potential tax complications is the fact that Registered Domestic Partners will be required to file different returns for federal tax purposes. Due to the Defense of Marriage Act passed by Congress and signed into law by President Clinton on September 21, 1996, the federal government does not recognize Registered Domestic Partner status. Therefore, Registered Domestic Partners cannot file a joint federal income tax return. Instead, they must continue to file separate federal personal tax returns.

Normally, taxes are calculated by preparing the federal tax return and then calculating adjustments to arrive at the California income taxes owed. However, Registered Domestic Partners will need to each calculate their separate federal tax return, and then combine their figures to arrive at one total adjusted gross income for their joint California tax return.

Thanks, in part, to Senate Bill 105, the “SB 105 – Domestic Partners Joint Income Tax Filing Implementation Bill,” the process for Registered Domestic Partners to file state income taxes is to being made simpler, by making those modifications necessary to implement SB 1827.

The California Franchise Tax Board, the governing body for California taxes, is currently considering alternate calculation methods that may be proper to ensure that Registered Domestic Partners are not having different adjusted gross income figures than if they were married. It is important to speak with your tax and legal professionals to discuss how joint income tax filings in California may influence your personal planning.

Additional California Tax Laws

The change in the taxation codes also allows the treatment of Registered Domestic Partners as spouses for Real Estate Withholding Tax Statements if they sell or transfer certain jointly-owned California real property that will be reported on their California 2007 (or later) tax return. And, beginning with the California 2006-2007 fiscal year, the taxation codes were updated so that certain transfers of real estate ownership interests between Registered Domestic Partners will no longer be considered a “change in ownership.” This means that such covered transfers will not result in an increase in California property taxes as was previously the case. This is a continued move by California to provide Registered Domestic Partners with the same rights as married couples, as spousal real estate transfers are exempt for property tax increases.

California Community Property

Like married couples, Registered Domestic Partners also enjoy community property rights in California, unless the registered couple has opted-out via a properly drafted agreement. When planning for your 2008 finances, it is important to ensure that your asset ownership reflects your joint wishes. We remind people that fall is a perfect time to ensure that your assets and estate plans are in order before the rush of holiday traveling.

In re Marriage Cases

Finally, the legal community is closely watching the right to marry cases in California. These consolidated cases, known as the “In re Marriage Cases,” concern marriage equality for same-sex couples. The California Supreme Court unanimously agreed to review the cases, and parties on both sides continue to file court papers, anticipate oral arguments and await the Court’s decision. If you would like to follow the progression of the case, you may go to the California Appellate Court website click here and review all of the different filings for this case from November 13, 2006 to present. And, at the bottom of the page, you may even sign-up for automatic e-mail notifications.

Conclusion

The recent legal changes involving California Registered Domestic Partners, and pending law on the right to marry, make it critical to begin partner planning as soon as possible to ensure there are no surprises at tax time.

April C. Ball, Esq. is an Associate Attorney with Grace Hollis Lowe Hanson & Schaeffer LLP. She has a J.D. and an LL.M. in Taxation, and her primary practice areas include estate & personal planning, same-sex issues and business planning. For additional information, you may contact her at info[at]gracehollis.com or via her firm’s website: click here.

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