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California Releases Income Tax Rules for Same-Sex Spouses

1 min readBy: Josh Barro

State TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Review (subscription required) reports that the California Franchise Tax Board has issued rules for income tax filing by same-sex married couples. As in other states that have legalized gay marriage or civil unions, same-sex married couples in California will face added tax complexity. This is because they will be required to file as single for federal income tax purposes, but jointly (or married-filing-separately) for state income tax purposes. The California process will include determining a dummy joint federal Adjusted Gross IncomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” , representing what the IRS would have deemed a couple’s AGI to be, had they been able to file jointly at the federal level.

While same-sex spouses will have to jump through some extra hoops to file, most will save some money on taxes through the process. California has no marriage tax penalty except in its highest income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. , so couples earning less than $1,000,000 per year, whether gay or straight, generally see their state income tax liability reduced by marrying. This effect is especially strong when one spouse has a much higher income than the other. However, California’s 10.3% top income tax rate kicks in at $1,000,000 of income for both singles and married couples; so, same-sex couples consisting of two very high income people will face the double whammy of a complicated tax filing and extra tax liability.

That 10.3% rate (9.3% plus a 1% “surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. ”) is America’s highest, so of course California legislators are currently debating whether to raise it to 12.0% (see our Fiscal Fact on the push for higher rates in California). Wealthy gays and lesbians may wish to consider Massachusetts, which has both legal gay marriage and a flat, 5.3% income tax rate.