If the filing status on a return is married filing separately and the taxpayer lives in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), Form 8958 must be completed and filed with the return.
Community property laws apply to married individuals living in community property states who file separate federal tax returns. Each state's community property laws determine how both income and property should be allocated for federal purposes, whether community or separate. Thus, splitting an item between spouses is not always correct. Examples:
- Money earned while domiciled in a noncommunity property state is separate income;
- Property that was owned separately before marriage is considered separate while married, unless the taxpayer and spouse agree to convert it to community property;
- Inherited or gifted property received separately, property purchased with separate funds, and property converted from community to separate by agreement are all treated as separate property;
- Income from separate property is generally the separate income of the spouse who owns the property, but in several states (Idaho, Louisiana, Texas, and Wisconsin) income from most separate property is community income;
- Real estate may or may not be treated as community property depending on the laws of the state;
- Income earned after spouses are separated but before a divorce decree is issued may be community income or separate income depending on the state;
- A state may allow a spousal agreement as to whether to treat income or property as community or separate;
- Special rules apply to spouses who live apart for the entire year.
For these reasons and more, TaxSlayer Pro does not attempt to allocate the items in the tax return between the spouses on a MFS return; the preparer must determine the amount for each item in the tax return. IRS Publication 555 is an invaluable and authoritative resource to assist in completing a MFS tax return for a taxpayer residing in a community property state.
Generally, each spouse must report half of all combined community income and deductions in addition to his or her separate income and deductions. For example, each spouse reports half of their own W-2 wages and half of their spouse's W-2 wages on their MFS tax return. Generally, community income includes:
- Income from community property
- Salaries, wages, or pay for services of the taxpayer, the taxpayer's spouse or RDP, during the marriage or registered domestic partnership
- Real estate that is treated as community property under the laws of the state where the property is located
To properly report community income in a married filing separate tax return, you will enter half of the taxpayer's AND the half of the spouse's community income items separately, dividing the amounts from each in half. For example, Spouse A and Spouse B are domiciled in a community property state. Spouse A's W-2 wages are $40,000 and the amount of Spouse A's federal withholdings is $4,000. Spouse B's W-2 wages are $60,000 and the amount of Spouse B's federal withholdings is $6,000. Enter Spouse A's W-2 in the income menu, but only enter $20,000 in box 1 (half of the community income) and $2,000 box 2 (half of the community withholdings). Next, enter Spouse B's W-2 in the income menu as if the Spouse A had earned it. Enter $30,000 in box 1 (half of the community income) and $3,000 in box 2 (half of the community withholdings).
Enter any other community income items (interest, dividends, etc.) in the income menu, reporting only half of the amount of each item.
After all income, credits, and deductions have been entered you will use Form 8958 to allocate the community income amounts between Spouse A and Spouse B. To access Form 8958, from the Main Menu of the Tax Return (Form 1040) select:
- Miscellaneous Forms
- MFS Allocation for Community Property States (8958)
- The taxpayer's information from the tax return will pull to the taxpayer's column of the form.
- For each line, enter the spouse's amounts as appropriate. The total column will reflect the total amount of all community items.
NOTE: This is a guide on entering the MFS Allocation Record into the TaxSlayer Pro program. This is not intended as tax advice.