For same-sex couples, a tax victory that doesn’t feel like one

Posted by Scott James on nytimes.com:

"A decision in May by the Internal Revenue Service that was hailed as a step toward equality for same-sex couples has instead become a headache for tens of thousands of gay and lesbian families in California.

"Same-sex couples who are registered domestic partners — or who married during the brief legal window — are facing a new, more complicated tax status, one that has raised a litany of expensive concerns. Many of these families will now have to pay for professional help to file by April 15.

"The issues involve an I.R.S. decision that affects the three states with both community-property laws and marriage for same-sex couples or registered domestic partnerships: California, Nevada and Washington.

"Married heterosexual couples in those states have long had the option of filing their federal taxes separately and splitting their earned incomes (community property) on their tax returns. If one person makes more than the other, splitting can result in paying lower taxes by taking the higher earnings down a tax bracket or more.

"After gay rights advocates fought for five years, the I.R.S. decision let the same rules apply to legally partnered same-sex couples — an estimated 60,000 in California.

"Pan Haskins, an Oakland tax consultant and proponent of the change, called the decision 'a big step forward in recognition of same-sex couples and our property rights under state law.'

"But carrying out the change has proved challenging.

“'There’s no box to check' on tax forms to indicate the relationship, Ms. Haskins said.

"The omission is problematic. Employers send W-2 income reports directly to the I.R.S., so it could appear that some filers are cheating on their taxes or underreporting income and could face penalties.

"It has already happened — to the man who prompted the I.R.S. change in the first place.

"Eric Rey, the chief executive of an agricultural biotech firm, earned more than his partner of 27 years and thought it was unfair that heterosexual couples with comparable earnings paid lower taxes. So with his friend and neighbor, Donald H. Read, a tax lawyer, he challenged the I.R.S. in 2005.

“'I’m not a rabble-rouser,' said Mr. Rey, 54, sipping coffee at the French Hotel cafe in Berkeley, his gray knit shirt buttoned to the top, 'but I don’t shy away from a fight if I believe in the principle of something.'

... "Since their victory, however, it has been an ordeal. Mr. Rey filed amended tax returns, as the decision allows, to have about $11,000 a year refunded from when he was overtaxed. But many I.R.S. agents were unaware of the change.

"As a result, Mr. Rey said he had faced a barrage of bureaucracy, with I.R.S. letters arriving every two weeks (usually by registered mail, requiring a trip to the post office). He has not received his entire refund, and his partner — accused of under-reporting income — was billed $20,000 for compounded interest and penalties.

“'The decision hasn’t really rippled down to all hands,' Mr. Rey said.

"Same-sex couples do not have the option of waiting for these issues to be resolved. The decision on income-splitting appears to be mandatory and immediate.

“'I do not believe taxpayers can choose whether to follow the income-splitting rule,' Patricia Cain, a law school professor at Santa Clara University and leading expert on same-sex tax law, recently wrote. 'The law is the law and you must follow it.'

"If only it were that simple.

"Linda Keslik, a tax accountant, is advising clients affected by the law not to file electronically. 'There’s no way an e-file return can understand all these splits,' Ms. Keslik said, adding that for paper returns accountants have created makeshift work sheets for the I.R.S.

"Translation: same-sex couples will need expertise to file this year, at a probable cost of hundreds of dollars per household.

"I.R.S. officials declined to discuss the matter.

"Confusing and costly tax returns are not the only fallout from the I.R.S. change; the policy has set off a chain reaction of other concerns. In a report to Congress last week, the federal Taxpayer Advocate Service put the situation in its 'most serious problems' category, saying the change could have many unintended consequences, like on student loan eligibility and tax credits for same-sex couples.

"This small taste of equality, it appears, could come at quite a price — one that heterosexual married couples do not pay.

“'It’s drawing attention to the inequities,' Ms. Haskins said."

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