MFS Community Property Income

[10409000]

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. 

[BobKamman]

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.  

[JRC]

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]

what about when the other one is not available?

[JRC]

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....

[sjrcpa]

"what about when the other one is not available?"

What does this mean? 

The other spouse's income is not available?

Did they cease living together? If so when?

[BobKamman]

Check state law on when the community is considered to have ended.  

[Roz1]

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]

SCHEDULE 1? I mean that if you make 50% for each new return why Sch 1 to allocate? How do you make 50% of a W-2? Confused!

[HOPE2]

Yes, assume around Sep 20th 2022, one went out and said good bye to see you at court and never pick up the phone and answer by email. The other one keeping house and living. 

[HOPE2]

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

[10409000]

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. 

[Roz1]

I wrote Schedule E, not W-2's.

[HOPE2]

I have another question. If spouse prefer to file MFS and any of those wants to file his/her own income what about 8958? In this scenario both are available.

And if we leave this box unchecked : Are allocated community property ...... for in communnity prop state what happens?

When this matter? Once they want to get divorced? When they want to ......? I do not know? What was the philosophy of creating 8958? 

Most of the clients who one has high income and his/her spouse has low income they did not pick up 50/50. If they do not take 8958 should leave uncheck that box? 

A hero come in here and save me from this misunderstanding.

Proseries even has no any video for this MFS, but has a lot of videos for selling E-signiture ....

[10409000]

So I did some reading and i realized that on some of the very few MFS returns i did i never realized or understood "Community Property Income" so basically when i seen form 8958 i always check "no community property income" and bypassed the form.. as of today neither i or my client has had any issues but as of this year i will no longer ignoring 8958 and will be advising clients that they now have to report comm prop income.. they will prob go somewhere else.. or they might end up filing as mfj.. but if they still want to do MFS I feel like referring them to someone more knowledgeable regarding comm prop income. i did read on pub 555 that if the taxpayer tried obtaining the spouses income and wasnt able to get it then we can put "no" on form 8958 and we must document our files. i have 2 clients who are married to each other but going thru divorce and i mistakenly kept both of them as clients but now i realize i need to either fire both of them and refer them elsewhere due to conflict of interest etc. if any of what i said is wrong please correct me as i am still learning. 

[HOPE2]

I feel you completely.

[HOPE2]

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

I was asking you, Sch E? For MFS?

[HOPE2]

Do not give up. Lisa and IronMan are always helpful. Wait!

[BobKamman]

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.  

[HOPE2]

Hi Bobkamman, could you please help me to get answer of my questions: 

I have another question. If spouse prefer to file MFS and any of those wants to file his/her own income what about 8958? In this scenario both are available.

And if we leave this box unchecked : Are allocated community property ...... for in communnity prop state what happens?

When this matter? Once they want to get divorced? When they want to ......? I do not know? What was the philosophy of creating 8958? 

Most of the clients who one has high income and his/her spouse has low income they did not pick up 50/50. If they do not take 8958 should leave uncheck that box? 

A hero come in here and save me from this misunderstanding.

Proseries even has no any video for this MFS, but has a lot of videos for selling E-signiture ....

[BobKamman]

It is not a question of client preference.  If there is community income, use Form 8958.  If it isn't, the clients should have some evidence of that if they are residents of a community-property state, and then they can report just their own income.  Since separate returns usually result in more total tax being collected, IRS is unlikely to audit them in order to issue a refund.  But there is really only one right way to do it.  

On the other hand, MFJ should not be the mindless default.  Too much time is spent by too many taxpayers and advocates, on "innocent spouse" cases, Preparing tax returns should not require training in psychology and counseling, but unfortunately the risks can't be ignored.  

[HOPE2]

Thanks a lot, it was very helpful.

Sorry about that I ask this question. I have read one post here, one said that I leave unchecked box on 8958 in Community state and I enter all income of one spouse. Is this ok? or should be checked in all of circumstance when we file MFS since we are in Community sate like California even the other spouse file MFS.

[10409000]

quick question do we do anything with the federal tax paid on the W2 can we split 50% of the fed tax paid? or only splitting the income? my client had 45,000 of income and her spouse made 140,000 of income and shes getting hit with a huge tax bill when i add 50% comm prop income and her husband said good he is happy that she has to pay his tax. 

[BobKamman]

You split the withholding too.  

[10409000]

here would i split the withholding at.. sorry for the questions but your help is greatly appreciated 🙂 

[BobKamman]

Same way you split income -- 50/50.

Get it out of your head that what's his is his and what's hers is hers.  What's theirs is theirs.  Everything you need to know about sharing you learned in kindergarten.  Share the income.  Share the credits.  

[HOPE2]

Thanks, should be attached  all W-2s from couple to each separated return or for each return just only his/her own W-2 and other documents, I mean what documents should be attached even 1098, 1099-div,....

[HOPE2]

Thanks, do you leave unchecked the box on 8958 in community states like CA and did it work?

[HOPE2]

I think this is a good idea as we disregarded comm prop, thanks for your support. But one thing more, at this situation, what documents do you attach for wife or spouse? Do we need attach her W-2, 1099-B or 1098 mortgage,... to FED?  Or state?

 A speedy response will be much appreciated.

[abctax55]

"...what documents do you attach "

Are you paper filing ??

[HOPE2]

I did not get it?

[Simple_Simon]

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]

@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. 

[msmith7305]

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.