Community Property - MFS - Nonres return for non-Community Property State

[MC4]

I have a married couple domiciled in NM filing separately. One spouse has some of her wages sourced to CO. Since CO works off of federal AGI/filing status, I'm unsure how to prepare the CO return(s).

Do I prepare 2 MFS returns for CO, each showing half the CO wages/tax withheld?

Or do I mock up a federal MFS return for that spouse without the 8958 allocations to get her amounts to flow through to CO? In which case, I imagine the CO return can't be e-filed, since CO is a piggyback filing state.

[BobKamman]

@qbteachmt is the expert around here for married couples with income from both community property and non-community property states.   

[qbteachmt]

Thanks for that shout-out, but I am no expert for community States or multiple States or even individual States. There are some things I follow closely and stay current on, and there are some things I happen to have researched or will research, but far from an expert.

https://www.irs.gov/publications/p555

NM is a community property State, so that would all be split. CO is a martial property State, similar to mine. You didn't note if that was earned with a presence in CO, or by remote work, or? A nonresident is required to file a Colorado income tax return if they: are required to file a federal income tax return, and had taxable Colorado-sourced income.

"Married taxpayers who file their federal income tax returns separately must also file their Colorado income tax returns separately."

From: https://tax.colorado.gov/income-tax-topics-part-year-residents-nonresidents

And: https://tax.colorado.gov/part-year-and-nonresident

[MC4]

Hi qbteachmt, thanks for taking the time to reply during these busy times. Most of my state returns are NJ/PA, so my experience in this area is limited. 

The CO wages are due to her performing services in CO. I do understand the 1040 and NM allocation/preparation, just haven't been able to find specific guidance on how to prepare their CO return(s).

I know CO filing status will have to be MFS; I would assume that a marital property state would not follow 8958 allocations and thus she would report her actual own amounts on her CO return - but it won't be consistent with her federal AGI...

[jeffmcpa2010]

Curiosity raised it's head.

I am also in  Community Property State (Washington). We almost never have separate returns in WA, When I have ran the numbers there was not tax benefit, and without that  most don't want to pay me double the fee. Do you actually get a tax benefit from filing separately? or are there other reasons?

Thanks

Jeff

[MC4]

It's because one spouse has large student loans and does income-based repayment; the income shown on a joint return would increase her repayment amount. 

It would be fine if she didn't have the CO-sourced income...but it really mucks things up (in my mind) in terms of not only the CO return but the credit for CO taxes paid on their NM returns as well.

[jeffmcpa2010]

OK I get that situation,

Of course I have convinced myself that clients come to me because they know I will give them my opinion, and therefore they have to listen to it when I get ready to give it.

And I of course would tell them to buckle down and pay off the ****(I saved intuit the trouble of putting in the *'s) student loans and quit making the minimum payments they can get away with. I have had SEVERAL retired couples making payments on student loans, and I don' t want to have any more.

I do have on couple doing what you describe currently, but she is only a couple of years from getting her balance forgiven (like we all know how often that actually happens) and I don't argue with them, because they have the payoff amount sitting in an account ready to write the check if the forgiveness doesn't go through.

[MC4]

Yeah, she went to law school so I imagine the debt is fairly sizeable. It's too bad, as their returns are pretty simple otherwise - just wages and a little bit of dividend income.