Level 4

Question

MFS Community Property Income

Forum|Forum|3 years ago
January 2, 2023
5 replies
1 view

Hi, I use Pro Series Prof. my client lives in CA and wants to file MFS. It will be my first time. I cant really wrap my mind around the community property situation. I dont have any education or training on MFS for Comm. Prop. I tried doing a test in the software to play with it and see how it works.. and i read lots and lots of post on here regarding the situation and i see alot of people have issues with it. I also read pub 555 three times. On my test account i put Taxpayer has 20,000 of income and spouse has 40,000 of income on 8958 and noticed that didnt change the numbers on the return. So i pulled up the "Other Income Statement" Line 13 and seen a positive community property adj and a negative comm prop adj. I entered in the amounts there and same thing happens.. nothing the spouses income doesnt show up anywhere on the return. I also don't understand how the tax works.. so if taxpayer makes 20k..and spouse makes 40k.. so total community property income is 60,000. If I take 50% of that i get 30,000. so do i have taxpayer pay tax on her 20,000 plus tax on the 30,000 for her total income to be $50,000? and her spouse what do i put on his..he made 40k..but if i add 50% comm income that brings him to 70,000? Im so so confused and just wondering if i should just refer the client to someone else. I want to learn but not sure where to go to learn. Also what about federal tax withheld do i need to do 50% of that too? Im so lost and wondering how everyone else learned how to do MFS returns I feel so embarrassed asking this question.

ProSeries Professional

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BobKamman

Level 15

Do you have just one client, or two? Where does the other spouse live -- also in California?

If one has income of 20K and the other has income of 40K, then each pays tax on 30K. I would show the computations on a separate spreadsheet, then plug in the "split" numbers to the software and file paper returns. Instead of spending all day trying to pound square pegs into round holes.

1

10409000Author

Level 4

ok thank you. so basically, if I can word it correctly the spouse with the lower income has to pay taxes on their spouse's income and then the spouse with the higher income gets a tax break since part of his income was shifted over to his lower income spouse. 😞 Seems so unfair i wonder the reason why they make people do this on tax returns.

BobKamman

Level 15

Why does it seem unfair? No one forced them to get married, and no one is forcing them not to enter into a "disregard community property" agreement. (It doesn't have to be premarital.) Generally, IRS doesn't care as long as someone pays tax on all the income.

A page of history is worth a volume of logic. Oliver Wendell Holmes Jr. said that. Do you know why there are joint returns? Because in the early days of the income tax, married taxpayers in community-property states avoided the higher brackets by splitting their income, following state law. And Congress didn't include "community property laws shall be disregarded" to the statutes, as it does in some cases now. What it did was to make it possible for everyone to use lower brackets, by filing joint returns. The top of the form may say "Individual Income Tax," but that's just another lie, we all know it's a tax on couples, enacted back when everybody was expected to marry and nobody was expected to divorce.

JRC

Level 7

I complete a MFJ return first combining all income and expenses on this.

Then USE Form 8958 as a guide to split each item 50/50% between them.

After this you then need to prepare Two other returns that they will be filing Married Filing Seperate.

Use Schedule 1 to allocate the incomes between themselves.

Pain in da but to do.

HOPE2

Level 7

what about when the other one is not available?

JRC

Level 7

I would report your income 100% only than. MFS.

Who knows the other person may be living out of state or the couple may not be living together and unable to reach the other spouse.

What else can you do....

R

Roz1

Level 4

This might not be the best answer, but I just check no on form 8958.

Then I report only the client's income.

If they share income property you can issue schedule E w/50% split.

I have a few clients that file married separately and it works.

HOPE2

Level 7

Schedule E?????????!!!!!

HOPE2

Level 7

I feel you completely.

S

Simple_Simon

Level 2

Start by checking California rules for community property. In Texas community property is the default status and the only way around it is a separate property agreement signed by both spouses either before or after marriage setting forth the property that is specifically designated as separate. This becomes important in married filing separate and divorce and death situations. If they have made no arrangements for property to be designated as separate it is community property in Texas. Community property for income tax includes everything that is received during the marriage: wages, interest, dividends, rents, royalties, K-1 flow through income, everything that ends up on form 1040 is community property income by default. The entire income of the two spouses will be taxed according to current tax law so the filing status choice serves as a way to limit liability for tax not the amount of tax due. With joint status either spouse can be required to pay the entire tax due. With married separate one half of every item (income and deduction) on what would be the joint return is reported by each spouse without regard to who earned it. The only exception are those items that cannot be claimed at all when using married separate. The result is each spouse normally is liable for one half the total tax due and is only liable for his/her half of the tax due. Of course the subject being tax you can surely find exceptions to what I am writing here (review carefully the guidance concerning the taxpayer and spouse indicators for additional specifics) but the general concept is one of limiting liability and reporting each person’s respective share of community property income. The form that allocates the items of income and deduction between the spouses is included with each married separate return to acknowledge the total amounts reported to IRS under the respective taxpayer id numbers and then show the total is allocated to the two spouses. It is essentially a completeness check.

BobKamman

Level 15

@Simple_Simon wrote, "Community property for income tax includes everything that is received during the marriage: wages, interest, dividends, rents, royalties, K-1 flow through income, everything that ends up on form 1040 is community property income by default."

That is not correct in most, if not all community-property states. Gifts and inheritances remain separate property unless the spouse takes some action to indicate otherwise -- for example, putting them in a joint account.

M

msmith7305

Level 6

I believe he was referring to the "income" not the "property". In Texas, income from separate property is community income (with rare exception). Yes, the gift amount and the inherited amount are separate, but any income earned on that separate property is community property in Texas.

The IRS warns of this in Publication 555

CAUTION:

Separate income. Generally, income from separate property is the separate income of the spouse (or the registered domestic partner) who owns the property. In Idaho, Louisiana, Texas, and Wisconsin, income from most separate property is community income.

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