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Taxation of Domestic Partners

AB 205, as amended by AB 2580, the Domestic Partner Rights and Responsibilities Act (“Act”), was a complicated but landmark piece of legislation.  This California state law, which took effect on January 1, 2005, expanded domestic partner rights to include most, but not all, rights of married couples.  The legislation provided rights but also imposed responsibilities.  Family Code Section 297.5(a) gives community property rights.  It states:  “Registered domestic partners shall have the same rights, protections and benefits and shall be subject to the same responsibilities, obligations and duties under law . . . .”  The Act unfortunately raised legal uncertainty, however, on the interplay between state community property rights and state and federal income, gift and estate tax laws.  It also caused many other tax issues to rise to the surface.

SB 1827, signed by the Governor on September 30, 2006, revised two provisions in state tax law.  Family Code Section 297.5(g).  California law now permits domestic partners to file joint returns and actually requires them to file as married filing separately if they do not file jointly.  It also removed the provision of prior law that earned income would not be treated as community income.  Thus, the conflicts with federal tax law continue and remain today.  Now, it is crystal clear under California law that all income, whether earned or unearned, is treated as community income, split equally between the partners, absent a written agreement executed by both partners overriding the treatment.

While multiple income, estate and gift tax issues exist, three areas will be the focus.  The first deals with the treatment and classification of earned and unearned income.  The second deals with the tax treatment of division of property on dissolution of the domestic partner union as IRC Section 1041  does not apply.  The third deals with estate and gift tax treatment, including clarification of alimony payments received by a domestic partner. A registered domestic partner is defined as two adults who have chosen to share one another’s lives in an intimate and committed relationship of mutual caring.  To be recognized in California they must file a Declaration of Domestic Partnership with the Secretary of State and meet certain criteria.  Persons of opposite sex may register only if one of the partners is over age 62.

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