Federal and CA Married Filing Separate - CA residents - Income is not working out and is under reported

[TaxMama2020]

For MFS Federal Return:  Client has community property income (CA).  I input the W2 info as received and then entered the community property under Input>General>Community Property Allocation.  Tax return did not take into account community property income.  Has anyone been able to get this to work and flow?  If so, how? Does it then flow to CA return or is that an adjustment too in this sofware?

[itonewbie]

The form is not designed to flow the numbers anywhere.

[itonewbie]

That's why this allocation should be your first step of preparing the return, to guide the rest of your input for income/expenses/credits from community vs separate properties.

[deniserevell3]

That was my experience as well!!  Thank you for the thread!!

[itonewbie]

NP, @deniserevell3!  Have a great weekend.

[deniserevell3]

Thank you.  I don't know if this is correct but I simply cannot get the return to generate the correct amounts unless I allocate every single W-2, Schedule C income and expense, itemized deductions, etc. for a married filing separately for the wife and one for the husband.  I thought the software would do it but it does not.  I am worried the returns will be rejected when the wages don't match the W-2.  However, I will just attach a statement and my allocation workpaper and hopefully it will fly.

 Do you have any thoughts?!

[deniserevell3]

Thank you for your help.  I did have to allocate every single item on the Forms W-2 (i.e., social security wages, SS WH, medicare wages, med WH, etc. to get everything looking right.  I have only prepared returns in CO which is not a community property state so this was a new experience for me. 

I also had to call the CA State practitioner's hotline and ask them:

(1) Do the SE Tax and SE Tax Adjustment get divided between the spouses?

(2) Does the couple need a "Separation Order" to end the community property allocation for tax returns. 

The answer to both of the questions was "yes"

[itonewbie]

You can't cite a conversation you have with these agents to defend a notice or an audit.  That's why you should never take what they tell you for granted without verifying things yourself.

What you have been told about SE-tax in the case of married taxpayers filing separately in community property states is not exactly correct.  See §1402(a)(5) for what the statute says.

[deniserevell3]

Thank you for the warning!   Otherwise I would have filed the returns wrong!!  I finally found a California publication with two examples that match my taxpayers' situations.  Bizarre that the tax priority hotline people in CA do not know the tax law. 

Anyway, it looks like I can allocate all of the SE net income, SE Tax and SE AGI Adjustment to the husband who was the sole proprietor.  My E&O insurance and  I can't thank you enough!!  CA Publication 1031 is entitled "Guidelines for Determining Resident Status" which is why I didn't look at it earlier.  Luckily, it had the two examples of full time MFS residents of CA in it!

[itonewbie]

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@deniserevell3 wrote:

... Anyway, it looks like I can allocate all of the SE net income, SE Tax and SE AGI Adjustment to the husband who was the sole proprietor.  My E&O insurance and  I can't thank you enough!!  CA Publication 1031 is entitled "Guidelines for Determining Resident Status" which is why I didn't look at it earlier.  Luckily, it had the two examples of full time MFS residents of CA in it!

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It's good to bounce ideas off and that's the beauty of having forums like this.

The citation I provided is under Chapter 2, which pertains only to the treatment of SE-tax, not SE income, which is subject to community property laws.  Where in CA Pub 1301 did you see the example(s) that SE income should be allocated entirely to the spouse who operates the business as a sole proprietor?

[deniserevell3]

It was not an example.  Page 10 discusses separate property income and expenses.  The husband is the sole proprietor and the wife does not participate so it was considered separate property.  The spouses agreed it was separate and did not commingle the income or expenses.