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.
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.
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