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Sharing has a whole new meaning for anyone conducting a tax preparer job in California for same-sex couples. The recognition of domestic partnerships - when combined with community property laws - results in equal sharing of all income. Therefore, each individual shares in half the income regardless of who earned it.

A California tax preparer is familiar with how this situation affects state and federal reporting of income. The community property states of Nevada and Washington have created the same circumstances with their domestic partnership laws.

The income tax preparation for state returns must divide the income equally according to the community property laws of the state. But federal income tax returns still report only separately earned income. The individuals in these cases use a filing status of single since that's the only option for domestic partners under IRS rules.

Because the state domestic partnership laws are new, the income tax effect hasn't quite been accommodated in tax preparation products. For now, domestic partners are filing completely different state and federal income tax returns. No trouble has arisen yet. But, the IRS is known to compare federal tax filing to state returns. The potential for audits due to mismatches is unknown at this time.

The tax preparation industry has not equally divided community property income on the separate federal tax returns of domestic partners. Part of the concern is discrepancy between details on Form 1040 and information reporting such as a W-2. At this time, all of the income is reported on the federal 1040 for the actual income earner. This allows the IRS to match it with the Social Security number on other reporting documents.

Some paid tax preparers have suggested reporting an individual's half of community earnings by a domestic partner as "other income" on Form 1040. However, this changes the character of the income so that nobody includes it in the federal calculation of "earned income", which can affect some tax outcomes.

Other troubling results occur if the same splitting of community income for a state tax return were reported on a federal return. For example, there are questions about dividing self-employment income, which could duplicate some self-employment tax. That would occur if self-employment earnings for one domestic partner exceed the income cap for assessment of Social Security tax.

The murkiness of the situation means that the safest course is IRS tax preparation that is completely separate from a state tax return for anyone in a domestic partnership. Uncertainty will remain in the tax preparation business until the IRS is permitted to recognize joint tax returns for same-sex couples legally married under state laws.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for tax preparer job and tax professionals. Access to free questions for the California tax preparer is available on their website.

By Sawyer Adams
Article Source: http://EzineArticles.com/?expert=Sawyer_Adams