Married Filing Separately and
Community Property Training
January 15, 2015
Introduction
Married taxpayers come to VITA/TCE sites wanting
to file separately
•
•
Want to keep financial affairs “separate”
Avoid refund offset when one spouse owes
money
o Child support
o Student loans
o Federal or state taxes
o Other federally collectible debt
• VITA/TCE site should not file a separate return
“just because” the taxpayer requests it
Introduction
Taxpayers who have been separated for a long
time and haven’t divorced for a variety of
reasons
•
•
•
•
Religious reasons
Cost involved
Don’t want “stigma”
Children
Objectives
At the end of this lesson, you will be able to:
• List the conditions that must be met for a
VITA/TCE site to prepare a return with the
filing status of Married Filing Separately
(MFS).
• Identify the forms and worksheets in
TaxWise that must be completed when
preparing a MFS return.
Filing Status
5 Filing Statuses:
•
•
•
•
•
Single
Married Filing Jointly (MFJ)
Married Filing Separately (MFS)
Head of Household (HOH)
Qualifying Widow(er) with Dependent Child
Definition of Single
• Considered unmarried
o Unmarried
o Divorced under a final decree by 12/31
OR
o Legally separated under a divorce or
separate maintenance decree by 12/31
• NOT under interlocutory (not final)
decree of divorce
• Governed by state law
Definition of Married
•
Considered married
o Married and living together
o Living together in common law marriage
o Married and living apart, but not legally
separated under decree of divorce or separate
maintenance OR
o Separated under interlocutory (not final) decree
of divorce
• If not legally separated, then married
o MFJ
o HOH (if qualify)
o MFS
General Rule
• Generally VITA/TCE sites in California do
not prepare MFS returns
• Why? – Because of Community Property
rules
o
o
o
Adds to complexity of tax return – volunteers
not trained
Community income has to be split –
information on Form W-2 will not match
information on return
Other spouse may disregard community
property rules
What is Community Property?
Community property is property:
• That you, your spouse…, or both acquire during
your marriage…while you and your spouse… are
domiciled in a community property state. (Includes
the part of property bought with community
property funds if part was bought with community
funds and part with separate funds.)
• That you and your spouse… agreed to convert
from separate to community property.
• That cannot be identified as separate property.
Note: Also applies to Registered Domestic Partners (RDPs)
What is Community Income?
Community income is income from:
• Community property.
• Salaries, wages, or pay for services of you, your
spouse…, or both during your marriage…while
domiciled in a community property state.
• Real estate that is treated as community property
under the laws of the state where the property is
located.
Note: Also applies to Registered Domestic Partners (RDPs)
Community vs. Non-Community?
• Examples of community income:
o Wages
o Self-employment income
o Pensions *
• Examples of non-community income:
o Inheritances
o Pensions *
* Note that pensions can be community or noncommunity (or both), depending on where the
pension was earned.
Community vs. Non-Community?
Whether income is community property or not
depends on:
• Type of income
• Domicile of individual earning it
What is Domicile?
Domicile is defined for tax purposes as the
place where you voluntarily establish
yourself and family, not merely for a special
or limited purpose, but with a present
intention of making it your true, fixed,
permanent home and principal
establishment. It is the place where,
whenever you are absent, you intend to
return.
Change of Domicile
• You can have only one domicile at a time. Once
you acquire a domicile, you retain that domicile
until you acquire another.
• A change of domicile requires all of the following:
o Abandonment of your prior domicile.
o Physically moving to and residing in the new
locality.
o Intent to remain in the new locality permanently
or indefinitely as demonstrated by your actions.
• Domicile can be different from residence
o FTB presumes you are a resident if you spend
more than nine months in California during the
tax year.
Exercise # 1
Q: What requirements must be met for a
taxpayer to be considered “unmarried”?
Exercise # 1
Q: What requirements must be met for a taxpayer
to be considered “unmarried”?
A: To be considered unmarried, a taxpayer must
be:
• Unmarried
• Divorced under a final decree by 12/31 OR
• Legally separated under a divorce or
separate maintenance decree by 12/31
o NOT under interlocutory (not final) decree
of divorce
o Governed by state law
Exercise # 2
Q: What 2 factors determine whether
income is community property or not?
Exercise # 2
Q: What 2 factors determine whether
income is community property or not?
A: Whether income is community property
or not depends on:
• Type of income
• Domicile of individual earning it
Exercise # 3
Q: Is domicile the same as residence?
Exercise # 3
Q: Is domicile the same as residence?
A: No, in California domicile and residence
are different. The FTB presumes you are
a resident if you spend more than nine
months in California during the tax year.
The taxpayer’s “intent” is a relevant factor
in determining domicile.
Keep It Simple
•
No intent to teach all community property and
domicile rules in this class
•
VITA/TCE volunteers generally should not be
making determinations of community property
and/or domicile
o Taxpayers should be presumed to be residents of
and domiciled in California
o If in doubt, refer to professional preparer
•
Establish some easy-to-follow guidelines as to when
community property/income rules do not apply
•
If community property is not an issue, preparing a
return using MFS filing status is not complex
VITA/TCE and MFS
When can VITA/TCE sites do returns with MFS?
• Certain conditions must be met – must be sure
community property rules do not apply
• Must be crystal clear with no exceptions or gray areas
• All of the following 4 conditions must be met:
1. Taxpayer lived apart from spouse the entire
tax year and has NO intention of
reconciliation
2. No commingling of funds
3. Name and SSN (or ITIN) of spouse available
4. Site coordinator must approve the MFS filing
status
4 Conditions for MFS
1. Taxpayer lived apart from spouse the
entire tax year and has NO intention of
reconciliation
o Spouses do not live in same house, even
on separate floors/rooms
o No conjugal visits
2. No commingling of funds
o No joint bank accounts
o No property owned jointly or acquired with
community income
4 Conditions for MFS
3. Name and SSN (or ITIN) of spouse available
o Must be included on tax return
o On MFS returns, if one spouse itemizes, both
spouses must itemize – standard deduction not
allowed
o Taxpayer should be asked if spouse itemizes
o Taxpayers who take standard deduction should be
advised that IRS could disallow it
4. Site coordinator must approve MFS filing status
o Site coordinator, preparer, and quality reviewer
must be trained at advanced level and in this
community property/MFS training
o MFS should be exception rather than rule
Exception for NRA Spouse
• California resident whose spouse is a nonresident alien (with or without Taxpayer
Identification Number [TIN])
o Spouse lives in foreign country
o Taxpayer lives in US all year and does not
qualify for HOH
o Taxpayer does not want to file MFJ
• Put “NRA” in SSN field if no TIN
• Cannot claim personal exemption for spouse
if no TIN
• Return must be paper filed if no TIN
• Site coordinator approval required
Exercise # 4
Q: A taxpayer at your VITA/TCE site says
she lives and is married in Ohio, wants to
file MFS, and is working in California only
temporarily. What should you do?
Exercise # 4
Q: A taxpayer at your VITA/TCE site says
she lives and is married in Ohio, wants to
file MFS, and is working in California only
temporarily. What should you do?
A: The taxpayer should be referred to a
professional preparer to determine
residency and domicile.
Exercise # 5
Q: What are the 4 conditions that must be
met for a VITA/TCE site to prepare a
MFS return?
Exercise # 5
Q: What are the 4 conditions that must be met for
a VITA/TCE site to prepare a MFS return?
A:
1. Taxpayer lived apart from spouse the
entire tax year and has NO intention of
reconciliation
2. No commingling of funds
3. Name and SSN (or ITIN) of spouse
available
4. Site coordinator must approve the MFS
filing status
Must be crystal clear with no exceptions or gray areas
Exercise # 6
Q: What is the exception for a taxpayer with
a non-resident alien spouse?
Exercise # 6
Q: What is the exception for a taxpayer with a non-resident
alien spouse?
A: California resident whose spouse is a non-resident alien
(with or without TIN)
• Spouse lives in foreign country
• Taxpayer lives in US all year and does not qualify
for HOH
• Taxpayer does not want to file MFJ
If no TIN, cannot claim personal exemption for spouse
and return must be paper filed. Site coordinator
approval required.
Role Play
• John Doe, a taxpayer at your volunteer site,
has indicated on the Intake Sheet that he is
married but has not lived with his spouse
during the last 6 months of the tax year. He
does not qualify for HOH.
• What questions would you ask to determine
John’s eligibility for the volunteer program?
Preparing the Return
on TaxWise
Starting a Return
Choosing Filing Status
After selecting MFS, enter spouse’s name and SSN on the
MAIN INFO sheet, and answer the questions where fields
are red
Choosing Filing Status
Choosing Filing Status
Form 8958, Allocation of Tax Amounts Between Certain
Individuals in Community Property States, will appear on
the tree in red
Allocating Income on Form 8958
Fill in name
and SSN of
spouse
F3/CTRL Space (clear
red) the red fields in
column 3
Columns 1, 2 & 3
The amounts in column 1 (Total Income…) and column 2
(Allocated to Spouse…) should be the same
• The headings for columns 2 and 3 may be confusing,
as they both refer to “spouse”
• For in-scope returns, all income must be allocated to
the taxpayer (column 2)
Printed Form 8958
Printed form is
clearer than
TaxWise worksheet
Completing Form 8958
Be sure to complete pages 1 and 2 of Form 8958
Completing the Form 1040
On Form 1040, Line 39b, F3/CTRL Space (clear red)
the MFS box
California Form 540
No additional input is necessary on Form 540. Note
that FTB does not require Form 8958.
Printed Form 1040
Note location of
spouse’s SSN and name
on taxpayer’s copy of
return
Non-Resident Alien Spouse
Hand write
“NRA” in
spouse’s
Social Security
Number field
NRA
Printed Form 540
Location of spouse’s SSN and
name on page 1 of Form 540
Exercise # 7
Q: Where do you input the spouse’s name
and SSN on a MFS return?
Exercise # 7
Q: Where do you input the spouse’s name and
SSN on a MFS return?
A: After selecting MFS, enter spouse’s name and
SSN on the MAIN INFO sheet, and answer the
questions where fields are red
Exercise # 8
Q: After answering the questions relating to
residency in a community property state
on the MAIN INFO Sheet, what form will
appear in the TaxWise tree?
Exercise # 8
Q: After answering the questions relating to
residency in a community property state
on the MAIN INFO Sheet, what form will
appear in the TaxWise tree?
A: The Form 8958, Allocation of Tax
Amounts Between Certain Individuals in
Community Property States, will appear
on the tree in red.
Exercise # 9
Q: For a MFS return to be within the scope
of VITA/TCE, to whom must all of the
income on the return be allocated?
Exercise # 9
Q: For a MFS return to be within the scope
of VITA/TCE, to whom must all of the
income on the return be allocated?
A: For in-scope returns, all income must be
allocated to the taxpayer (column 2 of
Form 8958).
Exercise # 10
Q: Where is the checkbox to indicate
whether your spouse itemizes his/her
deductions?
Exercise # 10
Q: Where is the checkbox to indicate whether your
spouse itemizes his/her deductions?
A: On Form 1040, Line 39b, F3/CTRL Space (clear
red) the MFS box. You have to check the box,
then uncheck it before hitting F3. If taxpayer
knows that the spouse itemizes, simply check
the box.
Exercise # 11
Q: Does the Form 8958, Allocation of Tax
Amounts Between Certain Individuals in
Community Property States, need to be
sent to the Franchise Tax Board with the
Form 540?
Exercise # 11
Q: Does the Form 8958, Allocation of Tax
Amounts Between Certain Individuals in
Community Property States, need to be
sent to the Franchise Tax Board with the
Form 540?
A: No, the FTB does not require Form
8958. No additional input is necessary on
Form 540.
Summary
• Taxpayers come to VITA/TCE sites wanting to file
separately for a variety of reasons.
• To be considered unmarried, a taxpayer must be either
divorced under a final decree by 12/31 OR legally
separated under a divorce or separate maintenance
decree by 12/31.
• Generally, VITA/TCE sites in California do not prepare
MFS returns because of community property rules.
• Whether income is community property or not depends
on the type of income and the domicile of the person
earning it.
Summary
• VITA/TCE volunteers generally should not be making
determinations of community property and/or domicile;
when in doubt, refer to a paid preparer.
• Four (4) conditions must be met for a VITA/TCE site to
prepare a MFS return:
1. Taxpayer lived apart from spouse the entire tax
year and has NO intention of reconciliation
2. No commingling of funds
3. Name and SSN (or ITIN) of spouse available
4. Site coordinator must approve the MFS filing
status
Summary
• If a taxpayer’s spouse does not have a TIN because
he/she is a non-resident alien and lives in a foreign
country, put NRA in the SSN field. However, the
taxpayer cannot claim a personal exemption for the
spouse and the return must be paper filed.
• On a MFS return, the spouse’s name and SSN/ITIN is
entered in the Filing Status section of the MAIN INFO
sheet on TaxWise. Additionally, several questions must
be answered regarding the taxpayer’s residency in a
community property state.
Summary
• Income must be allocated on the Form 8958, Allocation
of Tax Amounts Between Certain Individuals in
Community Property States. For in-scope returns, all
income must be allocated to the taxpayer.
•
The checkbox to indicate whether the taxpayer’s spouse
itemizes is on Form 1040, Line 39b. If the spouse does
not itemize or if it is unknown, F3/CTRL Space (clear red)
the MFS box.
• The FTB does not require Form 8958. No additional input
is necessary on Form 540.
Questions??????