Disclaimer

2. Update on The Federal TaxFiling Requirements for Registered Domestic Partnersand Same-Sex Married Couples

3. Disclaimer For purposes of Circular 230 and unless expressly stated otherwise, nothing contained in these materials is intended or written to be used or may be relied upon or used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended. This program is a source of general tax information. Each client's situation is unique and the tax results described in this program are no guarantee of the outcome that may result in a particular client's situation. Therefore, it is highly recommended that you seek professional tax advice.

4. Who is Subject to The Filing Requirement Registered Domestic Partners in California, Washington State or Nevada Or residing in California and were legally married in California or another state or Canada where same-sex marriage is (was) legal New federal filing requirements effective for 2010 and beyond

5. Defense of Marriage Limitations(DOMA) Federal Law does not allow for the recognition of same-sex marriage, so the new Federal filing requirements are not based upon the IRS recognizing the RDP or the marriage; these requirements came about because the IRS must acknowledge that property rights are set by the State, and California is a Community Property State and confers community property upon all spouses.

6. Filing Requirementsfor RDPs and SS Married Couples • California • Married Filing Joint (RDP/MFJ) • Married Filing Separately (RDP/MFS) • Federal • Single • Head of Household *** Some couples are considering testing the waters and filing Federal Joint Return after also filing as stated above, then amending those returns.

7. Returns to Prepare • Since 2007 when California required RDPs to file as RDP/MFJ or RDP/MFS in order to properly file returns, you need to prepare: • Mock Federal Joint Return (not filed) • Joint California Return • Single or Head of Household Federal Return for each partner • Now since 2010, the same number of returns will be filed, but the Federal return will not recognize only each partners income and deductions, it must recognize the community property component of all items (if any)

8. Begin by reading the Instructions IRS Form 1040 Instructions and IRS Publication 17 A registered domestic partner in Nevada, Washington, or California (or a person in California who is married to a person of the same sex) generally must report half the combined community income earned by the individual and his or her domestic partner (or same-sex spouse). See Publication 555.

9. IRS Publication 555Revised again 2/24/11 Defines Community and Separate Property Gives Sample Worksheet Download Publication 555 from http://www.irs.gov/pub/irs-pdf/p555.pdf IRS Publication 555 was very recently updated and provides as follows:

10. IRS Q&A(included in materials) • In late 2011, the IRS issued a series of answers to frequently asked questions regarding filing these returns. The responses were based strictly on their understanding of community property as it applies to a husband and wife, not to same-sex couples who do not have the same federal tax protections. • Those of us practicing in the community do not necessarily agree with the answers the IRS has provided, so be sure your preparer understands that those answers are not law, they are merely an interpretation.

11. When is the Characterization of Property Important DIVORCE DEATH NOW FOR INCOME TAX PREPARATION

12. Separate Property Separate Property Community Property California Joint Tax Return

13. Community Property Splitting Federal Returns Separate Property Separate Property Community Property My Federal Tax Return Your Federal Tax Return

14. What is Community Property Community Property is property: • That you, your spouse or both acquire during your marriage while you are domiciled in a community property state • That you and your spouse agreed to convert from separate to community property (Transmutation) • That cannot be identified as separate property

15. Community Income is income from: • Community property • Salaries, wages, or pay for services for you or spouse • Real estate treated as community

16. What is Separate Property Separate Property is: • Property owned separately before RDP or marriage • Money earned living in a non-community property state • Received as a gift or inheritance during RDP or marriage • Bought with separate funds during RDP or marriage • Community Property both agree to transmute to separate • Prorata portion of property acquired with separate funds

17. Separate Income is income from: • Separate Property. The income belongs to the spouse who owns the property

18. Some Income Examples Community Property Separate Property • Wages, earnings and self employment profits • Interest and dividends from CP accounts • Rental income from CP • Gains and Losses for CP** • Pension distributions (prorated) • Unemployment Income • Interest and dividends from SP accounts • Alimony • Rental income from SP assets • Gains and Losses for SP ** • IRA distributions • Stock options (depends upon action dates)

19. Social Security The IRS has been asked to make a determination on whether Social Security earnings are Community Property or Separate Property for couples effected by the CCA. As of this date, the IRS has not commented on this issue. Please discuss this with your individual tax advisor to determine your own treatment of social security income.

20. Expenses Just as income is allocated between spouses, expenses shall be allocated as well for all CP assets. If the home is owned as a CP asset, then the deductions for mortgage interest and property taxes are split when paid with community property Other itemized deductions are also split if paid from CP income, including employee business expenses

21. Payment of Taxes • Withholding of Federal Taxes for CP wages is split • Self-employment tax (discuss with your own advisor) • Estimated payments cannot be split, each partner must file their own

22. Forensic Accounting Reasonable basis Documentation of methodology Agreement .

23. Examples from Amended Returns: Taxable Incomes $ 82,258 & $0 – save $ (4,859) $ 130,153 & $30,222 – save $ (1,153) $ 296,444 & <$10,570> – save $ (22,496) $ 612,243 & $32,231 – owes $ 560

24. Preparation Cautions Be cautious splitting certain items, such as: 1. Earned income – W-2 wages 2. Self-employment income 3. Qualified Dividends 4. Capital gains & losses 5. K-1 items of various character 6. Carryover losses 7. Losses from rental property 8. Items in partial years, beginning and end of relationship

25. Amending Prior Returns • California RDPs and Married Couples may (but are not required to) amend 2008 (watch statute of limitations date- will depend upon date 2008 return was filed) and 2009 Washington – 2008 & 2009, Nevada 2009 • In order to amend, both partners MUST amend • Statute of Limitation for 2008 may run on April 15, 2012 • Interest will be assessed for partner who owes

26. Filing Logistics • File in two separate envelopes • Mark on top of return “Pursuant to CCA 201021050” • Attach Pub 555 worksheet • Attach and breakout all withholding statements • Include Power of Attorney • Expect IRS correspondence • Amended returns are processed nationwide • File extension for 2011 • Paper filing for amended and 2011

27. Domestic Partnership and Spousal Agreements Partners/Spouses may enter into a formal agreement that affects and determines the status of their property and income, whether it is community property or separate property. The IRS will accept such agreements when prepared and executed subject to strict formalities.

28. Other Tax/EP Issues to Consider • No Unlimited Marital Deduction on transfers between RDPs and Spouses • During lifetime or on death • 2011 & 2012 Estate Tax Exclusion $5 Million • 2011 & 2012 Gift Exclusion $5 Million

29. Presented by: WENDY E. HARTMANN, Esq. BENNETT & ERDMAN 5670 WILSHIRE BOULEVARD, SUITE 1400 LOS ANGELES, CALIFORNIA 90036 (323) 935-0041 weh@bennetterdman.com www.bennetterdman.com