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Community Property - Indirect transfer of income

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    Community Property - Indirect transfer of income

    In 2004 I did a tax return for a divorced couple in a community property state - WI - splitting the community property income/expenses as per tax regs. My client just came back to me because "all of her friends and everbody she talks to" says the return was done wrong - they do/did not split their income when they got divorced and they got lots of $$$$$ back.

    So, I re-read a copy of the divorce decree and it states "The parties agree that for purposes of filing Fed & State Income Tax Returns for the year 2004, they shall cooperate in exchanging any and all tax information including but not limited to income, deductions, withholding, etc. between 1/1/04 and the date of the final hearing"

    Then I started to re-read Pub 555 and now I'm 2nd guessing myself.

    My clients met the conditions of 1, 2, and 3. However for number #4 the spouse that moved out still paid a portion of the mortgage, utilities and other bills as well as child support. Not including the child support, I take these payments to be the indirect portion of his earned income that was transferred during the year and I am correct in splitting the income.

    If not, I think that I was in the wrong and I should not have split the income.

    What do you think?

    From Pub 555:
    Spouses living apart all year. If you are married at any time during the calendar year, special rules apply for reporting certain community income. You MUST meet ALL the following conditions for these special rules to apply.

    1.) You and your spouse lived apart all year.

    2.) You and your spouse did not file a joint return for a tax year beginning or ending in the calendar year.

    3.) You and/or your spouse had earned income for the calendar year that is community income.

    4.) You and your spouse did not transfer, directly or indirectly, any of the earned income in (3) between yourselves before the end of the year. Do not take into account transfers of very small amounts or value. Also, do not take into account a payment or transfer to or for your dependent child, even though the payment or transfer satisfies an obligation of support imposed on your spouse.

    If all these conditions are met, you and your spouse must report your community income as discussed next. See also Certain community income, earlier.

    Earned income. Treat earned income that is not trade or business or partnership income as the income of the spouse who performed the services. Earned income means wages, salaries, professional fees, and other pay for personal services.
    http://www.viagrabelgiquefr.com/

    #2
    community ends

    Pub 555 notwithstanding, whether money is community income or not is determined entirely by state law, not IRS anything. Generally the community ends when spouses permanently separate. Since this happened for your client in a prior year, you would not split any earnings unless they shared it. I would not call paying bills to maintain the property or support the family as sharing unless they continued to use a joint checking account.

    Whether that will produce $$$$ refund depends on income and withholding. Presumably one spouse will get more and the other less when you amend the returns.

    Comment


      #3
      Wisconsin does not even follow the rules of Federal Spouses living apart all year. If notification of income/deductions occurs it MUST be split.

      Comment


        #4
        What constitutes permanent?

        [QUOTE=jainen]Generally the community ends when spouses permanently separate. Since this happened for your client in a prior year, you would not split any earnings unless they shared it. I would not call paying bills to maintain the property or support the family as sharing unless they continued to use a joint checking account.[QUOTE]


        If a married couple no longer resides together that does not make the relationship permanent. They need a legal document to determine permanent such as a decree of divorce or document of legal seperation. Until that time I believe the income is community irregardless if there is a joint account or not. I don't know about paying the bills though.

        Comment


          #5
          state law

          That's where state law is important. The final decree or legal separation is necessary for filing status, but that's a different issue. In California the community ends when they separate with no intention/expectation of reconciliation, a fairly imprecise definition. (Our family relationships are so mixed up, it's not uncommon for spouses to live together quite intimately after divorce.) I didn't know about Wisconsin's rule on sharing INFORMATION about income; California doesn't have that.

          Comment


            #6
            Community Property

            In California if you are married and living togeather in the same household, but choose to keep all your finances seperate, have seperate bank accounts, pay your own bills etc., etc. you are not required to split income when you choose to file MFS. The reason being you have no community property.
            Last edited by RLymanC; 11-17-2005, 12:22 AM.
            Confucius say:
            He who sits on tack is better off.

            Comment


              #7
              State of confusion

              I am positive I filed correct for Wisconsin, but I'm still not sure about Federal because of the fourth Federal condition. If Wisconsin law considers all income community property can it actually be disregarded for Federal purposes? And, what would be considered an "indirect payment"?


              I looked in Wisconsin Pub 109 and it states:

              "Federal law differs in that if you live apart from your spouse at all times during the taxable year and meet three other conditions, you must disregard certain state community property laws for federal income tax purposes(generally called the "living apart all year rule"). Wisconsin doesn't follow this federal treatment of spouses living apart all year.

              Your Federal income is the starting point for figuring your Wisconsin taxable income. Because of these differences between Wisconsin and federal law, you may be required to make adjustments to your federal income in order to arrive at your correct Wisconsin income."
              http://www.viagrabelgiquefr.com/

              Comment


                #8
                confusing

                I'm confused. First you write that they are a divorced couple. Then you write about spouses living apart all year. Two very different things in regards to the IRS no?

                Comment


                  #9
                  Community Income

                  The divorce was final in Dec of 2004. In Wisconsin the community Income must be split up to the date of divorce and Wisconsin does not follow federal rules.

                  My question is whether or not the Wisconsin Community Income can be disregarded for Federal income tax purposes?
                  http://www.viagrabelgiquefr.com/

                  Comment


                    #10
                    state law

                    The instructions quoted say you make an adjustment for federal laws. I've never thought about it that way. As far as I know, federal requires "share of community income" and that amount is determined under state law.

                    Comment


                      #11
                      Jainen

                      Finally - our winter storm caused loss of internet service - I've been trying to post since early today.

                      Originally posted by jainen
                      Pub 555 notwithstanding, whether money is community income or not is determined entirely by state law, not IRS anything.
                      Is this true in all cases?

                      Because in Wisconsin the income up to the point of "legal separation" is clearly community income if notification occurs. The divorce decree that was signed by both parties in December of 2004 clearly states that they were to notify each other of income/deductions up to that date, and they did.

                      I think I prepared the return correctly, however, if not I will stick my tail between my legs and do an amendment. And at this point I am sick to my stomach wondering whether or not I did prepare the Federal return correctly.
                      http://www.viagrabelgiquefr.com/

                      Comment


                        #12
                        Jesse, be careful

                        Did you prepare both ex-spouse's tax returns? If so, you may have a conflict of interest
                        here.
                        Do not have an answer to your specific question, though. Just wanted you to be
                        aware.

                        Comment


                          #13
                          Final Decree

                          My question is whether or not the Wisconsin Community Income can be disregarded for Federal income tax purposes?

                          Federal law states:
                          If the divorce was final on or before 12/31/04 you are considered single for the entire year and each individual reports there own income on two returns. Each taxpayer files a tax return. So, I would say yes to your question.
                          Confucius say:
                          He who sits on tack is better off.

                          Comment


                            #14
                            Originally posted by RLymanC
                            My question is whether or not the Wisconsin Community Income can be disregarded for Federal income tax purposes?

                            Federal law states:
                            If the divorce was final on or before 12/31/04 you are considered single for the entire year and each individual reports there own income on two returns. Each taxpayer files a tax return. So, I would say yes to your question.
                            Which has nothing to do with communitty income, that is the rule for filing status. The Pub quoted in the first post is exactly what Sec 66 says.

                            Comment


                              #15
                              Revenue Ruling 87-13

                              Take a look at Revenue Ruling 87-13 and see if it has any relevancy to your situation.
                              Link to RevRul 87-13:



                              It may be out of date, but it may be worth reading.

                              Comment

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