Married Filing Separately and Community Property Training January 15, 2015.

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 moneyo Child supporto Student loanso Federal or state taxeso 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 unmarriedo Unmarriedo Divorced under a final decree by 12/31

ORo 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 marriedo Married and living togethero Living together in common law marriageo 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 marriedo MFJo HOH (if qualify)o MFS

General Rule

• Generally VITA/TCE sites in California do

not prepare MFS returns

• Why? – Because of Community Property

ruleso Adds to complexity of tax return – volunteers

not trainedo Community income has to be split –

information on Form W-2 will not match information on return

o 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 Wageso Self-employment incomeo Pensions *

• Examples of non-community income:o Inheritanceso Pensions *

* Note that pensions can be community or non-community (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 residenceo 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 12/31o NOT under interlocutory (not final) decree

of divorceo 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

domicileo Taxpayers should be presumed to be residents of

and domiciled in Californiao 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 MFSWhen 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 reconciliationo Spouses do not live in same house, even

on separate floors/roomso No conjugal visits

2. No commingling of fundso No joint bank accountso No property owned jointly or acquired with

community income

4 Conditions for MFS3. Name and SSN (or ITIN) of spouse availableo Must be included on tax returno On MFS returns, if one spouse itemizes, both

spouses must itemize – standard deduction not allowed

o Taxpayer should be asked if spouse itemizeso Taxpayers who take standard deduction should be

advised that IRS could disallow it

4. Site coordinator must approve MFS filing statuso 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 non-

resident alien (with or without Taxpayer Identification Number [TIN])o Spouse lives in foreign countryo Taxpayer lives in US all year and does not qualify

for HOHo 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 # 6Q: 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

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)

Columns 1, 2 & 3

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

NRA

Hand write

“NRA” in

spouse’s Social

Security Number

field

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 # 7Q: 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??????