Married Filing Separately in Community Property State--help!

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Topic Author
Spiffs
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Married Filing Separately in Community Property State--help!

Post by Spiffs »

This past June, my wife and I moved to Wisconsin, which is a community property state, and we will be filing as married filing separately (MFS) this year (and for many future years), because of how Public Service Loan Forgiveness and Income-Based Repayment work (if you want more on this, please see "key notes" in my post here).

I have discovered that married filing separately in a community property state is pretty complicated, and if anyone knows the answers to my questions below on this, I would very much appreciate it! ...That said, I am aware that these questions are probably not that common, and will most likely need a phone call to the IRS and the Wisconsin Department of Revenue (DOR), ugh.

Note relevant to questions below: in Wisconsin, even income from separate property is considered community property (except for capital gains/losses that are from separate property).

Also, I should note that I have read through IRS Publication 555 (Community Property) as well as Wisconsin DOR Publication 109 (Tax Information for Married Persons Filing Separate Returns and Persons Divorced in 2013) and Publication 113 (Federal and Wisconsin Income Tax Reporting Under the Marital Property Act), but haven't found answers to these question or haven't been sure if I've understood things correctly.


UPDATE: my original questions that have been (at least partially) answered are included at bottom. Questions that are still unanswered follow immediately below.

Unanswered questions (if you know the answer, please let me know!)
  • Throughout the year, my wife and I have earned interest in a savings account held in both of our names (it's a "Joint Account with Right of Survivorship"). This past June, we moved from a common law property state (Ohio) to a community property state (Wisconsin). I know that the interest earned while we live in Wisconsin will be split 50/50 on my wife's and my married filing separately federal returns this year. But what about the portion of interest that was earned while we lived in Ohio? I am the primary account holder and the 1099-INT statement has my social security number attached to it, but do we split the part earned while we lived in Ohio 50/50 on each of our married filing separately part-year Ohio/federal returns, too (using nominee procedures), or not?
  • When splitting community income (earned in Wisconsin) 50/50 between my wife's and my married filing separately tax returns, do we use nominee procedures for dividing investment income of ours (as mentioned in IRS Publication 550 and 17)? Or do we just use Form 8958 (Allocation of Tax Amounts Between Certain Individuals in Community Property States), as specified in IRS Publication 555 (Community Property)?
  • For wages earned since we have moved to Wisconsin, do we split every entry on our W-2s in half (i.e. even pretax deductions for health insurance and HSA payroll contributions) on our Wisconsin and federal returns? Or do we just split income and withholdings from our W-2s in half, and enter everything else "normally"?
Questions that have been at least partially answered (I hope these are helpful for others; if you know the rest of the answer to any questions below, please let me know!)
  • For determining how much I can contribute to an IRA (earned amount and income limits), do I just look at the amount of earned income and total income (i.e. including dividends, etc.) that are in my name or held jointly (as if I did not live in a community property state)?

Answer: yes, at least for Traditional IRAs. Per page 10 of IRS Publication 590 (Individual Retirement Arrangements) my wife and I each (beyond the Kay Bailey Hutchison Spousal IRA Limit exception) figure our IRA contribution "limit separately, using his or her own compensation. This is the rule even in states with community property laws."

  • Throughout the year, I've accrued interest from U.S. Savings Bonds (that I pay annually) and received dividends from investments that are my separate property. On my federal tax return, I am assuming that I would claim 100% of the income that I earned from these sources before I moved to Wisconsin (before I came under community property law), and then only 50% of the income earned from these sources after I moved to Wisconsin (and my wife would claim the other 50%). Is this correct?

Answer: yes, at least to the second half of the question, per the response of the IRS in referring me to pages 4-5 of IRS Publication 555 (Community Property).

  • Last year, we filed as married filing jointly, and -from investments of mine that I sold- we had a capital loss carryover and foreign tax credit carryover. Do I get to claim those this year, or are do I split them 50/50 between my wife's and my tax returns this year, or are they lost now that we are filing as MFS in a community property state?

Answer: for the capital loss carryover, I claim the carryover on my MFS federal return, because it originated from my separate property--per a helpful message from a Boglehead, who pointed me to page 117 of IRS Publication 17 (Your Federal Income Tax For Individuals). For the foreign tax credit carryover, it looks like page 24 of Publication 514 (Foreign Tax Credit for Individuals) provides instructions for this situation.

  • We moved to Wisconsin to relocate for my wife's job and she had unreimbursed moving expenses (incurred before we became subject to Wisconsin's community property law). In this case, she claims 100% of her moving expenses on (Form 3903 - Moving Expenses of) her MFS federal tax return, and we don't split her moving expenses deduction in half and each claim 50% on our MFS federal tax returns, right?

Answer: my wife claims the unreimbursed moving expenses on her MFS return, because they were her expenses and were incurred before she became a resident of Wisconsin, and thus are not determined by community property law.
Last edited by Spiffs on Fri Sep 12, 2014 7:30 pm, edited 9 times in total.
123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Married Filing Separately in Community Property State--h

Post by 123 »

The people who make TurboTax (intuit.com) have the following general advice:

Married Filing Separately (MFS) taxpayers may not be eligible to claim the following tax benefits:
•Tuition and fees deduction
•Student loan interest deduction
•Tax-free exclusion of US bond interest
•Tax-free exclusion of Social Security Benefits
•Credit for the Elderly and Disabled
•Child and Dependent Care Credit
•Earned Income Credit
•Education Credits

Other drawbacks of Married Filing Separately:
•Taxpayers have a much lower income phase-out range for IRA deductions.
• Both spouses must claim the standard deduction, or both must itemize their deductions. One spouse cannot claim the standard deduction if the other is itemizing.
•This filing status generally pays the most tax of all the filing statuses.

Married Filing Separately in a Community Property state

When one or both spouses live in a community property state special rules apply for allocating income and deductions between each spouse’s tax return. Community property states are: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.

Each spouse generally reports one-half of the total income on each tax return.

The same goes for deductions – each spouse generally gets half of the deductions. This is often not exact, as for couples with an odd number of children.

If you use a tax software product it might be helpful to do a pretend/proforma workup of your taxes for last year as MFS to be more aware of the issues involved.
The closest helping hand is at the end of your own arm.
Topic Author
Spiffs
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Re: Married Filing Separately in Community Property State--h

Post by Spiffs »

123 wrote:The people who make TurboTax (intuit.com) have the following general advice...
Thanks for your response! I appreciate this, though -thanks to those publications that I mentioned at the bottom of my first post, ouf!- I do already have a general understanding of how married filing separately in a community property state works.
123 wrote:If you use a tax software product it might be helpful to do a pretend/proforma workup of your taxes for last year as MFS to be more aware of the issues involved.
This is a good suggestion, and I did try doing this, but I don't have (and haven't found) a tax software product that walks you through completing a MFS return in a community property state (TurboTax basically just says to make sure to follow the state's law and good luck, for instance).
Topic Author
Spiffs
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Joined: Sat Jan 19, 2013 10:33 pm

Re: Married Filing Separately in Community Property State--h

Post by Spiffs »

One additional question (I thought a Google search would yield an obvious answer, but apparently not!)...
  • Throughout the year, my wife and I have earned interest in a savings account held in both of our names (it's a "Joint Account with Right of Survivorship"). This past June, we moved from a common law property state (Ohio) to a community property state (Wisconsin). I know that the interest earned while we live in Wisconsin will be split 50/50 on my wife's and my married filing separately part-year Wisconsin/federal returns this year. But what about the interest earned while we lived in Ohio? I am the primary account holder and the 1099-INT statement has my social security number attached to it, but do we split the part earned while we lived in Ohio 50/50 on each of our married filing separately part-year Ohio/federal returns, too, or not?
Topic Author
Spiffs
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Re: Married Filing Separately in Community Property State--h

Post by Spiffs »

...And another related question that has come up:
  • When splitting community income 50/50 between my wife's and my married filing separately tax returns, do we use nominee procedures for interest and dividend income of ours? Or do we just use Form 8958 (Allocation of Tax Amounts Between Certain Individuals in Community Property States), as specified in IRS Publication 555 (Community Property)?
IRS Publication 555 is silent about whether nominee procedures should be used, but IRS Publication 550 (Investment Income and Expenses) says this about interest (and has an identical statement for dividends):

Nominee distributions. If you received a Form 1099-INT that includes an amount you received as a nominee for the real owner, report the full amount shown as interest on the Form 1099-INT on Part I, line 1 of Schedule B (Form 1040A or 1040). Then, below a subtotal of all interest income listed, enter “Nominee Distribution” and the amount that actually belongs to someone else. Subtract that amount from the interest income subtotal. Enter the result on line 2 and also on line 8a of Form 1040A or 1040.

File Form 1099-INT with the IRS. If you received interest as a nominee in 2013, you must file a Form 1099-INT for that interest with the IRS. Send Copy A of Form 1099-INT with a Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to your Internal Revenue Service Center by February 28, 2014 (March 31, 2014, if you file Form 1099-INT electronically). Give the actual owner of the interest Copy B of the Form 1099-INT by January 31, 2014. On Form 1099-INT, you should be listed as the “Payer.” Prepare one Form 1099-INT for each other owner and show that person as the “Recipient.” However, you do not have to file Form 1099-INT to show payments for your spouse. For more information about the reporting requirements and the penalties for failure to file (or furnish) certain information returns, see the General Instructions for Certain Information Returns.
Beth*
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Re: Married Filing Separately in Community Property State--h

Post by Beth* »

It sounds like you may need to find a CPA to help you with your taxes this year. Once you have this year as a model you may be able to follow it yourself in future years and save the cost of the accountant.

Given how specific your tax situation is I would be hesitant to rely on tax advice from a forum that most people join because they are interested in investments.
Topic Author
Spiffs
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Joined: Sat Jan 19, 2013 10:33 pm

Re: Married Filing Separately in Community Property State--h

Post by Spiffs »

Beth* wrote:It sounds like you may need to find a CPA to help you with your taxes this year.
That certainly may be the case! Thanks to help here and elsewhere, though, I've actually been able to answer several of my questions (I've updated my first post with a list of the questions I've had that have been answered and the unanswered questions that still remain).
Beth* wrote:Given how specific your tax situation is I would be hesitant to rely on tax advice from a forum that most people join because they are interested in investments.
Probably good advice, too--I am looking to verify the answers I get here (or from any forum) with authoritative documentation (such as IRS publications).
flyingbison
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Re: Married Filing Separately in Community Property State--h

Post by flyingbison »

Might be easier to get a divorce. :twisted:
Topic Author
Spiffs
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Re: Married Filing Separately in Community Property State--h

Post by Spiffs »

flyingbison wrote:Might be easier to get a divorce. :twisted:
Haha, I know, right!?! :shock: ...Only three questions left, though!
Topic Author
Spiffs
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Re: Married Filing Separately in Community Property State--h

Post by Spiffs »

Another question that is pretty minor (I think?), but I can't find an answer to, anywhere:

My filing status and state requires the use of Form 8958 as a part of my federal return (see: http://www.taxact.com/support/1662/comm ... eparately/). On this form, I am supposed to enter my income and my spouse's income, and allocate exactly 50% to me and 50% my spouse. TaxACT and TurboTax don't allow me to do this, though, as they don't allow cents to be entered on Form 8958, so when the income that needs to be divided between my spouse and me is an odd number (say, $10,125), I can't divide it exactly in half on Form 8958, as specified (because 50% of $10,125 would be $5,062.5, which TaxACT and TurboTax will round up to $5,063 or round down to $5,062 for my and my spouse’s allocation, resulting in TaxACT and TurboTax generating an incorrect total income of either $10,126 or $10,124). What should I do in this case? It is important to me to be able to (at least try to) e-file.
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