Comments about MFSn & California

[rfk]

Does any one know about MFS & how incomes earned by spouses are to be counted in a community property state? If one spouse makes $65k and the other $70k, do they have to split the "total" income down the middle for MFS, community property state purposes? Or is it based on what they make themselves individually? I am inclined to believe that whatever one spouse makes is what is reported on their own personal MFS return, regardless of community property state situation.

Can someone please shed light on the nuances on this "little" confusing thought.

Thanks!

[Gary]

Split

The correct way is to divide the total income by 2 for each. If one of the taxpayers brought income into the marriage with them (such as a K-1 or a rental property), then this income or loss belongs to the individual.

[S T]

MFS California

CFS Tax Tools has a Really good worksheet for this situation.
See Pub 555 for additional info

First of all is the couple living together for the entire year
OR
Did the couple separate during part of the year.

If lived together the entire year then you would split the incomeand deductions 1/2 to each as outlined in Pub 555, example wages, earnings and net profits from a sole proprietorship wold be community income. Dividends, Interest and Rents from community property are community income, Some income could be either community property or separate property such as pensions, civil service retirement, military retirement pay.

If couple separated during the year, then you would 1/2 the income and deductions during the time they lived together, and then the period they were separated would be their own separate income

Not a fun return to complete!

Sandy

[Gary]

Split

Sandy:

"If couple separated during the year, then you would 1/2 the income and deductions during the time they lived together, and then the period they were separated would be their own separate income"

Isn't this true only if they are legally separated, and not just living apart?

Gary

[S T]

Calif MFS

California requires you to use the same filing status on California as used on Federal.

I believe the "legal separation agreement" filed with the court is only needed if you were trying to file as "Single"

Pub 501

Single
Your filing status is single if, on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree, and you do not qualify for another filing status. To determine your marital status on the last day of the year, see Marital Status , earlier.

Married Filing Separately
You can choose married filing separately as your filing status if you are married. This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return. If you and your spouse do not agree to file a joint return, you have to use this filing status unless you qualify for head of household status, discussed next.

From Pub 555

Separate Return Preparation
If you file separate returns, you and your spouse must each report half of your combined community income and deductions in addition to your separate income and deductions. List only your share of the income and deductions on the appropriate lines of your separate tax returns (wages, interest, dividends, etc.). For a discussion of the effect of
community property laws on certain items of income, deductions, credits, and other return amounts, see Identifying Income, Deductions, and Credits, earlier.

Divorce or separation. The (equal or unequal) division of community property in connection with a divorce or property settlement does not result in a gain or loss. For information on the tax consequences of the division of railproperty under a property settlement or divorce decree, see Publication 504. Each spouse is taxed on half the community income for the part of the year before the community ends. However, see Spouses living apart all year, earlier. Any income received after the marital community ends is separate income. This separate income is taxable only to the spouse to whom it belongs.

From the FTB Publication - http://www.ftb.ca.gov/forms/97_forms/97_1051a.pdf

Example 2 — In 1995, you and your spouse are residents of and domiciled in California. For the first six months of 1995 you earned $30,000. Your spouse did not earn any income. On June 30, 1995, you and your spouse physically separated with no intention of reconciliation. During the last six months, you earned $30,000 and your spouse earned $10,000. You have decided to file separate returns. Determination: For the first six months of the year, your earnings were community income. You and your spouse must each report on your individual returns one half of the income earned during this period. When you and your spouse physically separated with no intention of reconciliation, your community income status ended. Therefore, from July 1, 1995, through December 31, 1995, the income earned by you and your spouse was separate income on your individual returns.

Sandy

[Maribeth]

If there is "Community Income", then that income is split 50/50 between the two spouses.

If there is "Separate Income", then that income goes to the spouse whose income it is.

You MUST look to your state's law as to what constitutes community income and what constitutes separate income.

Even if a couple lived together for the entire year, one of the spouses, or both, can have separate income if the source of the income has not been comingled with community income.

The easiest way I have found to prepare a MFS return with community income is to put ALL of the income on the return; prepare a worksheet that splits the income to each spouse; and then put the offsetting amount onto line 21 as a reduction.

Maribeth

[Maribeth]

Sandy:

"If couple separated during the year, then you would 1/2 the income and deductions during the time they lived together, and then the period they were separated would be their own separate income"

Isn't this true only if they are legally separated, and not just living apart?

Gary

You must look to your state law as to when the marital community dissolves. In my State of Washington, the marital community, for tax purposes, ceases at the time that bed and board ends. One spouse moves out, income earned after that is separate income.

Maribeth

[S T]

Same in Calif

Maribeth,
California recognizes the same - marital community ends the date of separation, does not have to be a court filed "legal separation"

"Legal Separation" for filing "Single" ends with a court document for tax purposes (and then maybe other legal purposes"

Sandy

[Gary]

Legal Separation

I didn't know that "legal separation" allowed one to file as "single". I thought only the divorce would allow tis.

[S T]

Legally

Gary,
Depending on your own State Laws,
There can be two filings.

California at least has two filings - Filing for Divorce, or filing for Legal Separation/Maintenance. In California it makes little to no sense to file for "Legal Separation/Maintenance" as it is the same cost as "Divorce" papers. But it can be done, and I have seen it for couples that really don't want the "actual" divorce" papers. Not quite sure why, as the papers are the same for both instances. Just something about that "finality" I guess.

Fortunately, IRS and Calif allow the taxpayer just to "Separate" without the Legal Papers.

California and, as far as I know IRS - will require that to file as "Single" the t/p either have the Legal Separation papers filed with the court, or a Final Divorce Decree. I could be wrong, but that is what I have always based my filing status as. Most of my clients never file the Separation Papers with the court

Sandy