There are a variety of miscellaneous tax issues that can impact registered domestic partners. It is important for both taxpayers and tax preparers to understand the potential tax implications of different situations so that any necessary filing adjustments can be made.

Expenses – The principle of community income in community property states treats half of community income and expenses as belonging to each spouse. Thus 50% of the expenses directly associated with community income should be split between the spouses on their federal returns. The IRS says the same principle applies for the returns of registered domestic partners in California.

The treatment of expenses not related to community income should be based upon the expense and whether it was paid from community or separate funds. Not all expenses paid with community funds can be split 50-50. An example is home mortgage interest where one of the partners does not have an equitable interest in the property. In such a case only the equitable-interest partner would be able to deduct one half of the interest and the other partner could deduct none (see Home Mortgage Interest and Equitable Ownership below).

Similar problems could arise where the education or medical expense of one partner is paid from community income. On their federal tax returns they are not allowed to deduct medical costs or claim an education credit for the other partner, and careful planning should be employed when determining if an expense is paid with community or separate funds. Do keep in mind gifts to pay for education and medical expenses are excludable from the gift tax rules when payments are made directly to the educational institution or medical providers. However, in Lang v. Commissioner TC Memo 2010-286 direct donor transfers made to a donee’s medical care provider by a third party (in this case the mother) were treated as gifts to the donee and subsequently deductible by the donee.

Transferring Property – Placing a partner on the title of a separate property is a gift and subject to the normal gift rules and gift tax filing requirements. Keep this issue in mind when establishing an equitable interest in a property for purposes of splitting interest and tax deductions (see Home Mortgage Interest and Taxes below). To avoid gift tax issues, consider a tenant-in-common ownership that can provide for a specific, less than 50%, ownership for the donee.

Basis Step Up – Step Down – Presumably, for federal purposes, there is no community property basis adjustment on both halves of the property when one of the RDPs dies (because they are not “spouses”). Only the inherited portion will receive a basis adjustment and the inheriting partner will retain his or her basis on their portion. For California, however, the usual full step-up/step-down basis adjustment will apply to the entire community property, creating a difference in basis for federal and state.

Itemized – Standard Deductions - For federal purposes, a registered domestic partner may itemize or claim the standard deduction, regardless of whether his or her partner does the same. (IRS Website Q&A 4) Typically this situation can arise when some of the deductible items are paid with separate property funds. When filing married separate status on California returns, RDPs must use the same deduction method, i.e., both must itemize, or both must use the standard deduction. When filing a joint California return, the use of itemized deductions or the standard deduction is not dependent on which method was used on the partners’ federal returns.

Estimated Tax Payments – The federal estimated tax payments must be claimed by the one who pays them. There is no way to allocate them at this time in the federal processing system. It is therefore necessary that careful consideration be given to preparing estimates based on the community property allocation lest you end up with one partner being underpaid and subject to underpayment penalties while the other has a substantial refund. (IRS Website Q&A 17)

Extensions – Each partner is required to file their own individual federal extension. However, for state purposes they can file a joint extension just like a married couple.

Bank Accounts – It may be appropriate for the RDPs to maintain a joint checking account and for each RDP to also have a separate checking account. Deductions are generally allowed to the taxpayer who is liable for the payment and who actually makes the payment. Having a joint and two separate accounts will allow the partners to selectively pay expenses either jointly or separately to take advantage of certain tax benefits. An example would be where one might qualify for head of household if that partner pays over half the cost of maintaining the household for a qualified individual.

Treatment of Community Income Where Spouses Live Apart – IRC Sec 66 provides that where spouses always live apart during the year, community property rules can be disregarded. However, because for federal tax purposes registered domestic partners are not “spouses,” Sec 66 does not apply to registered domestic partners. Therefore, they are always subject to the community property rules as long as the RDP agreement is in place. (IRS Website – Q7)

Rental Income or Loss - IRC Sec. 469 limits the rental real estate passive loss of an individual to a maximum of $25,000 and phases out that maximum loss when federal AGI is between $100,000 and $150,000. Attempting to make the community property rental gain or loss adjustment on Form 1040, Schedule 1 “other income” line 8z (2021) can lead to inaccurate passive loss limitation and carryover calculations. Therefore, it is recommended that the adjustments be made on Schedule E where the appropriate apportionment of income and expenses can be made between the two partners.

CAUTION - Since for CA the partners are filing jointly, they only have a $25,000 maximum passive loss limit, whereas for federal purposes they each enjoy the $25,000 maximum loss limit. In addition, on a joint return the partners’ incomes are combined, which will create a faster phase out than on the individual federal returns when the phase out floor is exceeded.

Home Mortgage Interest - IRC 163(h) limits the deduction for qualified residence interest to interest on $1 million of acquisition debt ($750,000 for debt incurred after December 15, 2017) and, for years before 2018 and after 2025, $100,000 of equity debt. Chief Counsel Advice CCA200911077 took the position that the $1 Million of acquisition debt limitation applies to the residence not the individual owners. Although not addressed in the Chief Counsel Advice the IRS would also say that the $100,000 equity debt would also apply to the residence and be limited to a single $100,000. Note: Home equity debt interest is not deductible on Schedule A for years 2018 through 2025. However, it may be traceable to another deductible purpose using the general interest tracing rules; see chapter 2.15.

The Tax Court backed up the IRS by ruling in C. J. Sophy, 138 TC No. 8, Dec. 58,965 that the unmarried co-owners are collectively limited to deducting interest paid on a maximum of $1.1 million of acquisition and home equity indebtedness. However, the Ninth Circuit Court of Appeals reversed the Tax Court’s decision and has held that the mortgage-interest deduction debt limits are applied to the unmarried co-owners on a per-taxpayer, not a perresidence, basis. The IRS has announced its acquiescence with the Ninth Circuit’s decision. Under this interpretation, two unmarried co-owners are collectively limited to a deduction for interest paid on a maximum of $2.2 million, rather than $1.1 million, of acquisition and home equity indebtedness (Voss - IRB 2016-31, p. 193). For post-12/15/2017 debt, two unmarried co-owners would be collectively limited to deduct interest paid on $1.5 million of acquisition debt. This can have significant implications for unmarried co-owners of a home. However, because the RDPs are filing married joint or married separate status for California, the $1.1 million (or $550,000 for MFS) indebtedness cap will apply on their California return. (As of mid-2022, California has not conformed to the reduced acquisition debt limit and the no-equity-debt interest deduction changes of the TCJA.)

AMENDED OPPORTUNITY - Taxpayers who previously limited their interest deduction in accordance with the IRS’ position and Tax Court ruling may be able to amend open year federal returns for a refund.

Home Mortgage Interest and Equitable Ownership – Individuals are allowed to deduct interest only if they are liable on the loan or have an equitable interest in the property, and they make the mortgage payment. Where an individual makes the mortgage payment but is not liable on the loan, and does not have an equitable interest in the property, that individual cannot deduct the mortgage interest and neither can the individual who is liable on the loan but paid none of the mortgage payments.

Home Gain Exclusion - IRC 121 allows an exclusion of gain on sale of a principal residence up to $250,000 on an individual return where the individual owned and used the home as a principal residence for 2 of the 5 preceding years. It also permits a $500,000 exclusion on a joint return where both filers used the home as their principal residence and one of the filers owned the home for 2 of the prior 5 years. Thus, it is possible that where only one of the filers owned the home they would qualify for the $500,000 exclusion on the CA joint return but only one of them would qualify for a $250,000 exclusion when filing individual Federal returns.

Tuition Credit – Who Claims the Credit? – This question sometimes arises related to the education credits on the federal returns. By law the credit goes to the individual who claims the student as a dependent, no matter who pays the tuition. So, each partner could pay tuition for a particular student, but the credit goes to the one who claims the student’s dependency. If community funds are used to pay the education expenses, the student partner may determine the credit as if he or she made the entire expenditure. In that case, the student partner has received a gift from his or her partner equal to one-half of the expenditure. (IRS Website – Q23 

Higher Education Interest Deduction – On a joint CA return the student loan interest deduction is limited to $2,500 but on individual federal returns each RDP would be allowed a deduction of up to $2,500. In addition, the AGI phase-out may impact the joint return differently than the individual returns.

Child & Dependent Care Credit – For individuals the federal credit is limited by the individual’s earned income, with community property rules being disregarded for purposes of determining earned income. However, on a joint return for CA purposes the credit is limited to the earned income of the lower earning partner. Thus, where only one partner has earned income, no credit would be allowed on the CA return even though credit was allowed on the federal individual return of the working partner. Even where both have earned income, because the credit is limited to the earned income of the lower earning partner, the credit may be reduced from the amount allowed for federal purposes.

Investment Interest Expense Deduction & Carryover – The Schedule A deduction for investment interest expense is limited to net investment income. On a joint CA return the investment income, investment expenses and investment interest of the individuals are combined and can produce results that are quite different from that of the individual federal returns of the partners. The currently deductible and carryover investment interest expense deductions can also be affected by pre-registration carryovers, and amounts related to separate and community incomes.

Net Operating Loss Carry Back or Carry Forward - If taxpayers haven't been married to each other in all net operating loss years, the net operating loss deduction may only be taken by the spouse who incurred the loss and only to offset income generated by that spouse in the carry back or carry forward years (Rev Rul 60-216).  Here again the ruling refers to a spouse and the RDPs are not spouses for federal purposes. Note: For federal NOLs incurred after 2020 (modified from 2017 by the CARES Act) there is no carry back provision, but NOLs arising in 2018, 2019 and 2020 can be carried back 5 years, with any loss remaining after applying the loss to the 5 prior years’ returns carried forward indefinitely.  For CA NOLs occurring in taxable years beginning after December 31, 2018, the 2-year carry back period is repealed. 

AB 85, the 2020 California budget bill, suspends NOLs for 2020–2022 for businesses with business income, or modified AGI, of $1 million or more.

California Joint Return – Based on the foregoing, where the NOL occurred in a year prior to becoming RDPs, the NOL loss would retain its character as a separate property deduction and can only offset the income of the partner to whom the carry forward is attributable.

Federal Returns – Since RDPs are filing individual returns the NOL goes on the return of the individual to whom the carry back or carry forward is attributed.

Employer Dependent Care Assistance (Sec 129) - Maximum W-2 exclusion per year is $5,000 or $2,500 for MFS (but for 2021 only, the maximum is $10,500 or $5,250 for MFS). However, on individual federal returns it is possible that each partner may have had dependent care benefits exempted from their pay, thus exceeding the limit on the joint CA return. When this occurs, the federal AGI for CA limitation purposes is increased by the amount that exceeds the limit.

ITC Expenses - The question has arisen whether the federal tax credit can be claimed for the adoption expenses of an RDP adopting their partner’s child. The IRC Sec 36C(d) definition of qualified adoption expenses include the following statement: “(C) Which are NOT expenses in connection with the adoption by an individual of a child who is the child of such individual’s spouse.”

Federal Returns - According to the IRS website, registered domestic partners are not considered spouses and therefore each registered domestic partner may qualify to claim the adoption credit maximum $17,280 per child in 2025 on the amount of the qualified adoption expenses paid or incurred for the adoption. The amount is up from $16,810 in 2024.

However, the partners may not both claim credit for the same qualified adoption expenses, and the sum of the credit taken by each RDP may not exceed the total amount paid. Thus, if both RDPs paid qualified adoption expenses to adopt the same child, and those expenses total more than $17,280 the maximum credit available for the adoption is $17,280. This maximum may be allocated between them in any way they agree, and the amount of credit claimed by one partner can exceed the adoption expenses paid by that person, as long as the total credit claimed by both partners does not exceed the total amount paid by them. (IRS Website Q&A 5) Additionally, if a registered domestic partner adopts his or her partner's child, the adopting parent can claim the adoption credit. (IRS Website Q&A 6) Where a registered domestic partner adopts his or her partner's child and the adoption expenses are paid from community property sources, then the adopting partner would only be able to use 50% of the expenses.

California Joint Return – Adoption of a partner’s child does not give rise to a CA credit since the CA adoption credit only applies to adoptions of children from a CA public agency or political subdivision.

CA AGI Limitations – Federal AGI is used to determine various limits on CA returns, including medical expenses, miscellaneous itemized deductions, IRA contributions and certain phase-outs. The federal AGI of an RDP or former RDP for limitation purposes will be the AGI determined as if the RDP or former RDP filed a federal income tax return using the same filing status as used to file their California income tax return. If no RDP adjustments, simply use the AGI(s) on the federal return(s). If an adjustment is necessary, use the worksheet in FTB Pub.737 or a pro forma federal return. (SB 105-2007)

Exemption Allowances – For years before 2018 and after 2025,  if the TCJA provision is not extended or made permanent, each RDP claims his or her own exemption deduction on their individually filed federal returns. The TCJA suspended the filer, spouse and dependent exemption deductions for years 2018 through 2025. If community funds are used to support more than one person who would otherwise qualify as a dependent, but neither RDP qualifies on his or her own to claim the dependency, the RDPs can agree which one of them will claim the dependent(s). They cannot, however, each claim half of the total exemption allowance amount in years when the exemption deduction is allowed.

Form DE-4, Withholding Allowance Certificate – Because of the RDPs’ different federal and CA filing statuses, careful consideration should be given to the differences in the DE-4 and the W-4. Without careful planning, RDPs may encounter over- or under-withholding. Under-withholding of taxes may result in penalties.

Form 593, Real Estate Withholding Tax Statement - RDPs who sell or transfer jointly owned CA real property are treated as spouses for purposes of completing Form 593, Real Estate Withholding Statement. Therefore, Real Estate Escrow Persons may complete and provide RDPs with a combined Form 593 listing both partners for the completed real estate transaction.

RDP Spousal Support – If a California Family Law Court awards spousal support (alimony), and the payment satisfies the requirements under tax law for alimony, it would be deducted by the payor and included by the payee on their CA returns. (As of mid-2022 California has not conformed to the TCJA change that makes alimony from post-2018 divorce decrees non-taxable to the recipient and non-deductible by the payer.) Since federal tax law does not include an RDP category, the federal treatment of these payments is uncertain. See “Alimony,” above.

RDP Property Settlements - If a California Family Law Court orders a division of mutually acquired property (acquired with separate and/or community funds), the treatment is the same as for a property transfer by married individuals in a divorce: no taxable event and each individual would assume the joint basis of the property he or she receives. However, since federal tax law does not recognize RDPs as being married, the treatment of the transactions is uncertain at this time.  For federal purposes it could be a gift, sale or part gift and part sale.

California Schedule CA Adjustments (line number references are for 2021 version)

• Medical Expenses - CA law does, and federal law does not, allow a deduction for medical expenses or qualified long-term care insurance incurred premiums (limited based on age) for a registered domestic partner and the partner's dependents.  (IRC Code §213(a), California R&TC §17021.7). Enter as an adjustment on Schedule CA (540 or 540NR), Part II, Adjustments to Federal Itemized Deductions, using lines 1 - 4.