WHAT’S THE CORRECT TAX FILING STATUS FOR CALIFORNIA GAY AND LESBIAN COUPLES?

Tax Expert Same sex marriage

Avo Asdourian, Tax Expert Same sex marriage

         Before you know it, April 15 will be upon us.   How would LGBT couples of California residents know what family status to take?

Although the state of California currently recognizes same sex marriage as legal, Gay and Lesbian couples still have the option to file as Registered Domestic Partners (RDP).  “As 2014 is the first year gay and lesbian couples can file as married couples, here are a few tips that might help LGBT couples decide which status best fits their needs.” said Avo Asdourian, EA Legal Tax Representative to the IRS.  LGBT couples can always take great benefit in consulting with Avo on their taxes especially when things get complicated and overwhelming. It’ easy to contact Avo either through this blog or when you click here. Contact Avo.

           As with the federal tax return, California allows same -sex couples to take the standard deduction for the taxpayer’s filing status or to itemize deductions. Choosing the larger of these two amounts will result in the lower tax.  

 

California standard deduction is $3,906 for single and married/RDP filing separate.

California standard deduction is $7,812 for married/RDP filing joint, head of household, and qualified widow(er).  

 

Taxpayers may itemize deductions on the federal return and claim the standard deduction on the California return, or, conversely, claim the standard deduction on the federal return and itemize deductions for California. 

california

For federal tax purposes, registered domestic partners are considered single.  If one itemizes, the other is not required to itemize.

 

For California returns, if the partners file using the married/RDP filing separate status, both must itemize deductions or both must take the standard deduction.

 

For California returns, if partnes file as married/RDP filing joint, use the more advantageous amount – standard deduction or itemized deductions.   Be sure to include both partners’ expenses when computing the itemized amounts.

 

For both federal and California returns, expenses paid by community funds (such as wages) must be equally divided between partners. Expenses paid by separate funds are deducted by the partner who paid them.

Example:

Minney and Lili are registered domestic partners who lived together all year in California. Minney earned $60,000 in wages and Lili earned $20,000 in wages. They own a home together and paid $10,000 in mortgage interest for the year from their combined bank account. Minney received an inheritance of $2,000 and used it to pay the $2,000 property tax bill.  How much in mortgage interest and property taxes may Minney claim on her federal itemized deductions?

$5,000 of the mortgage interest and $2,000 of the property taxes

She may claim 50% of the mortgage interest paid with combined funds, but all of the property taxes since they were paid from separate funds.

When itemizing deductions for California, modifications to the federal Schedule A amounts may be required to adjust for differences in California tax law.  Use Part II of Schedule CA (540) to make any necessary adjustments.

All medical expenses deductible on the federal tax return are deductible on the California return.  In 2013, the federal adjusted gross income (AGI) medical expense threshold increased from 7.5% to 10% for taxpayers under 65; the 7.5% floor continued to apply for individuals who were age 65 or older.   California did not conform to the increase in threshold to 10%.  Therefore, on California tax returns, an adjustment may be required on Schedule CA (540), line 41.

 

Example: 

Wanda Worker is 50 years old.  Her 2013 AGI totals $50,000.  Her medical expenses on her federal Schedule A are reduced by 10% of her AGI  ($5,000).  The adjustment on her California Schedule CA is $1,250 [$5,000 ˗ (7.5% × $50,000)].   

One situation where medical expenses deductible for California are not deductible on the federal return is for RDPs.

 

Registered Domestic Partner (RDP) Expenses

In California, medical expenses for an RDP may be handled in one of two ways:  

 

The general rule is that community income and deductions paid from community funds are split.   Any deductions, including those for either partner’s medical expenses, would be split between the two taxpayers on their federal return and on the California return if filing separately.  They would be combined if filing jointly in California.
 

If one partner uses separate funds to pay medical expenses, then those expenses may be taken as a separate deduction on that partner’s federal tax return. If the expenses were for the other partner, that person may be considered a qualifying relative except that they failed the gross income or joint return test.  See IRS Publication 502 for more information.

Another situation where medical expenses deductible for California are not deductible on the federal return is distributions from Health Savings Accounts.

 

Health Savings Accounts (HSAs)

Medical expenses paid with qualified distributions from an HSA may be deducted on the California tax return, even though they are not deducted on the federal return.

 

Calculate the deductible California medical expenses by subtracting 7.5% of the taxpayer’s federal AGI from the total amount of medical expenses paid (including those paid from HSA distributions). Include the difference between the California and federal amounts in California itemized deductions by entering it on Schedule CA (540), line 41.

EXAMPLE:

Eddie (38) took an HSA distribution of $5,000 to pay all his qualified medical expenses. His federal AGI is $35,000. On his federal Schedule A, he has no deductible medical expenses. How much medical deduction may be he include with his California itemized deductions?  Eddie (38) took an HSA distribution of $5,000 to pay all his qualified medical expenses. His federal AGI is $35,000.  On his federal Schedule A, he has no deductible medical expenses.   How much medical deduction may be he include with his California itemized deductions?

 Eddie may deduct $2,375 [$5,000 – (7.5% × $35,000)]

OVERWHELMED?

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