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Chad Goldman and Brian Pendelton have been together for 11 years. They are legally married in California, and have built a business together during the past decade, of which Pendelton is the sole owner. While married heterosexual couples can transfer unlimited assets to their spouses upon death, Goldman and Pendelton have a 300-page legal document to ensure that Goldman wouldn’t be hit with millions of dollars in tax liability if Pendelton died.
“We have this crazy Byzantine trust that we had to set up to make sure it didn’t bankrupt the company if something happened to Brian,” Goldman said. “We’ve spent millions in life insurance to cover the potential tax burden. It’s expensive being gay.”
While taxes are complicated for just about everyone, same-sex couples in California must tackle something of a moving target, as both the state and federal governments continue to adjust if and how their relationships are recognized. And now, with the year nearing its end, same-sex couples are preparing for yet another change in tax policy.
In June, the Internal Revenue Service (IRS) announced that it will recognize same-sex relationships — some of them, anyway.
In a reversal of the position the IRS took in 2006, couples registered as domestic partners in California can treat any income as community property, just as married couples do. However, the new rule will not recognize community property of same-sex couples who married in California before the passage of Proposition 8.
In an effort to help same-sex couples sort out what all this means — and how to avoid an audit — the City of West Hollywood will sponsor a tax and estate planning seminar at Plummer Park tonight. Co-hosted with the Williams Institute, a national think tank based at the University of California, Los Angeles (UCLA) School of Law, the seminar will feature a panel of LGBT scholars and law professors who will try to break down how the new IRS policy affects for same-sex couples.
“The fact that we even have to have programs like this, where same-sex couples have to go to a special program to focus on the new developments in tax law says a lot,” West Hollywood Mayor John Heilman said. “Opposite-sex couples may need to do estate planning as well, but the law is pretty settled. They don’t need to worry about getting the latest information.”
About 50,000 couples have registered as domestic partners in California since the state began allowing it in 2000, most of them same-sex couples. Until this year, the federal government didn’t recognize those partnerships, and couples have had to file separate state and federal tax returns. Under the new policy, couples would still have to file federal returns separately, but each will report half of the couple’s total income. If one partner made $100,000 in 2010, for instance, and the other made $50,000, both would file a federal return for an income of $75,000.
Confused yet? There’s more.
Brad Sears, executive director of the Williams Institute and an adjunct professor at UCLA School of Law explained that the new system would create several different categories of same-sex couples in California. Couples who are registered as domestic partners, including couples who are also married in California, may file federal returns as explained above. But for married couples who are not registered as domestic partners, the new IRS policy does not change the way they file tax returns, because the Defense of Marriage Act prohibits the federal government from recognizing same-sex marriages. But couples who married in another state and then moved to California may be eligible to benefit from the community property law.
“In California, the legal landscape is fairly complicated right now for same-sex couples,” Sears said. “The law is going to have a different impact on different couples. Some will pay less in taxes, some will pay more, and for some it will have no impact.”
Now are you confused? So are the couples who the new policy affects.
West Hollywood City Councilmember Jeffrey Prang wasn’t quite sure how the change in the law would affect him. He is legally married to his partner in California, and in a registered domestic partnership.
“The fact that the IRS has taken a step forward is very encouraging, but we’re still a long way from granting full recognition and equality to LGBT families,” Prang said.
Goldman and Pendelton, meanwhile, who are also registered as domestic partners, were not even aware of the new IRS policy.
“I know in the previous two years since we got married that we had to file a joint California return and then two separate individual returns for federal taxes,” Pendelton said. “I didn’t know it had changed again. We have an accountant that takes care of all this.”
Those seeking answers about filing tax returns in a domestic partnership can attended the Williams Institute forum tonight from 6 p.m. to 8 p.m. at Plummer Park, 7377 Santa Monica Blvd.
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