A new California law taking affect this year, which changes the way more than 40,000 registered domestic partners in California will file their 2007 tax returns, is a symbolic victory for same-sex couples.

It sounds simple, according to local tax attorneys Larry Conway and Gregg St. Cyr, but the financial impact won’t always be positive, and most will face new tax-filing and planning headaches when filing their taxes this year.

Conway and St. Cyr led an informational session on Jan. 28, for registered domestic partners to discuss tax developments surrounding the new law requiring registered domestic partners to file joint state taxes the same as heterosexual married couples do.

“It means for tax year 2007 and beyond, they can choose married filing jointly or married filing separately, the same options married couples generally have,” Conway explained at the discussion. “However, domestic partners must continue filing their federal taxes as single or head of household.”

“This is where the headaches come in,” the CPA who has prepared taxes for more than 25 years told the audience of approximately 60 people.

To comply with the law, registered partners will need to calculate two versions of their federal 1040 form, which is the starting point for determining how much state tax they’ll owe. Each will fill out the first 1040 the same as usual – typically as a single taxpayer – to calculate how much to pay Uncle Sam. Then they will fill out the second hypothetical 1040 as if they were married, either a joint return or as married filing separately. They’ll use this 1040 as a jumping-off point to calculate what they owe the state as a “married” couple.

The presentation sponsored by The Center not only covered the new filing requirements California places on registered domestic partners to file jointly, but also how the state’s domestic partnership law affects income, gift, estate and property taxes, meaning things can quickly get sticky.

“It’s much more complicated than just adding each partner’s income and deductions together,” St. Cyr said. “The discrepancy in filing status will create many problematic issues that have yet to be resolved, such as whether one partner’s capital losses can offset the other’s capital gains for state taxes.”

“Similar issues could taint eligibility for saving in an IRA and affect how much capital losses a couple can deduct in a given year,” the tax professionals explained. “Instead of simply picking up their adjusted gross income from their federal returns, domestic partners will face a thicket of revisions to derive a ‘magical, hypothetical’ adjusted gross income figure as a married couple for state purposes.”

Additionally, software developers don’t have the answers to devise ways to incorporate the hypothetical federal tax return, they explained. In many cases this will leave tax professionals to essentially do an extra return for each of the affected gay and lesbian clients they serve – not only resulting in more time, but also additional costs.

“Carefully handling our money and financial records is now more crucial than ever because the change in filing status can potentially trigger state audits, changes in your tax liabilities, and liability for your partner’s debts,” St. Cyr explained.

Despite the potential drawbacks, some registered couples are happy with the new law.

“Politically, it’s just one step closer to accepting that members of [the GLBT] community are equals, financially in California and hopefully federally at some point,” said Thomas Hoodley, who is in a registered partnership. “While it may mean headaches for the time being, I do think that it will ultimately benefit us in the long run.”

Others are a bit more wary, fearing the potential loss in money due to tax law changes may outweigh gains in benefits such as health coverage and other areas – even making some who are not yet registered second guess there plans.

“Unfortunately we now must place more weight on the benefits of registering or not,” said Trisha McNeeley, a North Park resident who plans to file for domestic partnership with her partner on the couple’s 10th anniversary in May. “I appreciate that this could be the beginning of California being out in front of the nation in terms of recognizing domestic partners as full citizens. But we’ve been together this long without being legally recognized, we don’t need a piece of paper to validate our future if it’s going to mean our financial stability.”

“I’m not advising anyone to not file for a domestic partnership or telling those who are registered that they should get it dissolved. However I will say that it is now time for same-sex couples to obtain professional advice when facing filing taxes under current circumstances,” Conway concluded.

The California State Tax Board is the second state tax board to recognize same-sex couples or domestic partnership with the new filing status. Massachusetts is the first state to offer such a filing status. Sen. Carole Migden, (D-San Francisco), authored SB 1827, which applies only to couples who have registered as domestic partners with the secretary of state, not with cities that offer registration.

The Franchise Tax Board estimates the law will reduce state tax revenue by $8 million in fiscal 2007-08. The estimate was based on a sample of 935 same-sex couples, not necessarily registered partners.