MFS spouses live apart all year in a community property state

[Austin_Cat]

Hi everyone! I've been round and round my state association, friends who are tax preparers, my own research, and I am still uncertain. I admittedly should not have taken both of these returns, but here we are. Husband and wife in Texas, still married, now living together trying to work things out, but were living apart all of 2023 and 2024. Now, this is Texas, a community property state that has no legal separation. I did not prepare their returns in 2023, but they are clearly wrong. I won't go into details to keep it short. My question is, under IRC §66 and Publication 555, there is a provision for spouses living apart all year under which they do not have to report each other's income. However, I've received deferring opinions on how to approach this. Some say to report use the 1/2 of the spouse's income approach and some say they do not have to. I'm about to lose my mind on this. I'm attaching some screenshots. In Texas, W2 income is community property. I do not know if they transferred income between bank accounts, but suspect they did. I suspect they probably had a joint bank account.  Any thoughts? Please help me stay sane, haha. P.S. I could only get the first screenshot to upload correctly but you get the idea.

[BobKamman]

What's the problem?  I know it's Texas, but they still speak English there.  Section 66 and Section 879, to which it refers, are not that difficult to understand.  Pub 555 is just an effort to make them even easier.  Separated all year + Texas = each reports just his/her earned income.  (If you have community unearned income, then split it.)  

[Austin_Cat]

Ok thanks. That's what I'll do. I tend to make things harder than I need to. I wanted this confirmed. In your opinion should I even ask about the comingling or transfer of funds? Also, no matter what, the spouse if married HAS to report the spouse's name and TP ID, correct? They did not do that last year. Also, if I do it the way you suggest, do they have to follow the itemized versus standard deduction rules and do it the same way? Or does that not apply also? thanks so much for your help.

[BobKamman]

You sure ask a lot of questions.

In your opinion should I even ask about the comingling or transfer of funds?

I don't consider having a joint bank account (if there was one) as the "transfer" of funds that the statute mentions.  I wouldn't ask.  IRS is not in the marriage counseling business, all they care about is that someone pays tax on all the income without gaming the system to distort the result.  Since splitting the income usually results in the lowest tax, any deviation from that is going to increase the tax collected, and Billy Long will be as happy as a Missouri hog, not that I am implying in any way that he resembles one.    

Also, no matter what, the spouse if married HAS to report the spouse's name and TP ID, correct?

I don't know of any statute that requires that.  Do you?  IRS may refuse to accept returns filed electronically without both SSN's but that's just their way of finding out how high you will jump.  

 do they have to follow the itemized versus standard deduction rules and do it the same way?

Why not?  But remember, Section 66 only relates to earned income.  It doesn't say anything about splitting deductions.  Might be difficult to figure out who gets to claim them, or whether they have to be split.  

[Austin_Cat]

Thanks for your time. The 'you sure ask a lot of questions' is a bit caustic since I thought this forum was for that. Every time I ask something on here I get scolded somehow or just plain insulted. What is the forum for? What am I missing? Can we be kind to one another? I just talked to my final CPA (talked to 4 of them) who agrees with my handling and your opinion so I'll file and be done. I am new, uncertain, and come from a firm of CPAs who were extremely thorough and high billers. I think these questions are perfectly normal. And again, thanks for your time. You did provide a bit of guidance and I appreciate it.

[BobKamman]

After you have been in business for a while you will learn that when a client says, "before we begin..." (sorry, we have already begun) "...may I ask a quick question?  . . ." (you just did) and then follows with a question that requires many more facts and circumstances than can be conveyed "quickly."  And that one question leads to five more questions.   Which will make you want to comment, "you sure ask a lot of questions."  I won't say that to my clients, but with other professionals I will wonder why they just don't put all their questions on the table at once.  

Hint:  Don't start out with  "I won't go into details to keep it short," but then tiptoe around the subject in your next post so that we have no idea what really happened, just that it upset you.