Community Income or Not

[dsi]

My research has resulted in...more confusion.
H and W live in CA, on Indian reservation land. H is Indian and is a tribal member. W is not Indian.

H & W do not co-mingle their bank accounts or any of their other assets. All of H's income is derived from tribal employment, and for CA purposes is sourced to the tribe, and therefore is considered exempt income. All of W's income is from non-tribal sources.

Q: When filing MFS, can H report 100% of his income on his return, and W report 100% of her income on her return? (-vs- 50-50 on each return?)

[jaybird]

I ran into a few of these here in Idaho - also a Community Property state. After much communication with my State Tax commission, I came to understand that as long as the tax is being paid on what it needs to be paid on (the W's income in your scenario), then the stat really doesn't have a problem. Especially when most frequently, these cases arise due to divorce/separation - thus making it vary difficult to gather all info necessary to truly divide all income for the year.

That being said, it would seem less advantageous for your taxpayers to file MFS AND separate income from each source. What's the reason to file MFS? What is the reason to put all taxable income on one return? If you split the taxable income, wouldn't you be able to spread that into a lower marginal tax bracket? 20k is taxable on one return, 10k on two returns probably equals 0 tax, plus some credits?

Some things to think about.