Each must report half of his or her community income on separate returns, the Service says in a private ruling. Previously, the IRS had required each partner to report his or her actual share of earnings, regardless of community property laws. The agency changed its position after California amended its law to treat earned income as community property for state income tax purposes unless the couple opted out.
The new rule takes effect for 2010. But filers can apply it retroactively to 2007 and file amended returns if doing so will save them tax. The partners still file as singles. They cannot file jointly or use married filing separately status because that is available under federal tax law only for traditional married couples. The IRS' new position means that, in some cases, high income domestic partners filing as singles will pay less total tax than a married couple with the same income.
It is unclear whether domestic partners in Nevada and Washington are affected. Both states have community property laws, but neither one levies an income tax on individuals. So until the IRS says otherwise, the ruling applies to California only.