Filing MFS in a Community Property state - long

[Buckeye]

My sister lives in WA which is a community property state. She and her husband live in the same house but they live completely separate lives (financially and emotionally) and have for several years. There is no legal separation in place. They filed jointly last year because it made financial sense. She's done filing jointly, even if it reduces her refund.

For 2014, she intends to file MFS. Her personal situation is simple with respect to income as she has one W-2. Her husband's situation is more complicated. He has some business that's web related and I think he might even have a W-2 this year. He never pays estimated taxes so they always get paid from her withholding and any other credits. The refund also pays his outrageous tax prep fees.

At first I thought she would just claim her wages, give him half the mortgage interest and property taxes to itemize (she has made every payment but the deduction is derived from community property), and claim the minor child since she has easily paid more than half the child's support.

I have read Pub 555 (especially page 7, Community Property Laws disregarded) several times but I'm not 100% sure if she is allowed to just claim her income and not 50% of her income and 50% of his income. If this year is like the last 25 years, her income is a lot more than his and she is doing him a favor by not forcing him to use 50% of her income as 50% of his income.

So, the question is - Can a spouse in a community property state use only her W-2 wages when filing MFS given the 'separation' that exists as described above?

 

[rodi]

I think she needs to talk to a tax professional AND a family law attorney.

 

[W2R]

I think she needs to talk to a tax professional AND a family law attorney.

+1

She really needs some expert help at this stage, in my opinion.

 

[Buckeye]

A divorce would force the sale of the house which is not acceptable until her daughter graduates in a couple of years. With no help from hubby, the mortgage payment consumes 50% of her take-home pay leaving very little extra for tax professionals and lawyers.

 

[Texas Proud]

I did taxes way back when..... well, when I was young...

I never did file a MFS return, so do not know for sure.... I just want to point out that Federal taxes do not have to follow state laws... So if you have read that she can claim 100% of her income and he claim 100% of his... then it is probably correct...

I would not split the deductions..... whoever paid should take the deductions...

 

[haha]

My sister lives in WA which is a community property state. She and her husband live in the same house but they live completely separate lives (financially and emotionally) and have for several years. There is no legal separation in place. They filed jointly last year because it made financial sense. She's done filing jointly, even if it reduces her refund.

For 2014, she intends to file MFS. Her personal situation is simple with respect to income as she has one W-2. Her husband's situation is more complicated. He has some business that's web related and I think he might even have a W-2 this year. He never pays estimated taxes so they always get paid from her withholding and any other credits. The refund also pays his outrageous tax prep fees.

At first I thought she would just claim her wages, give him half the mortgage interest and property taxes to itemize (she has made every payment but the deduction is derived from community property), and claim the minor child since she has easily paid more than half the child's support.

I have read Pub 555 (especially page 7, Community Property Laws disregarded) several times but I'm not 100% sure if she is allowed to just claim her income and not 50% of her income and 50% of his income. If this year is like the last 25 years, her income is a lot more than his and she is doing him a favor by not forcing him to use 50% of her income as 50% of his income.

So, the question is - Can a spouse in a community property state use only her W-2 wages when filing MFS given the 'separation' that exists as described above?

If I understand you, they live together. That is it, they are married and will be married on December 31, 2014. They also live together, so they fail the test that would allow them to each file single. Their filing status must be either married filing jointly, or married filing separately.

If she makes most of the income, she is almost certainly better off MFJ than MFS. Is she worried that he is hiding income? If not, just declaring that "I am done filing jointly" will cost her more than she realizes. MFS returns attract more audits than mfg also. Surely if she can stand to live in the same house with him, she could stand to file a joint return? Just use a tax preparer to get the information from both of them. https://turbotax.intuit.com/tax-too...ple-File-Jointly-or-Separately-/INF20239.html.


One statement you made but did not seek comments on- I am not at all sure that a house must be sold immediately on divorce. Unmarried people own property together all the time. Time is ticking away on her life, her husband's life, and their daughter's life. It may be that spinning out this arrangement for whatever reasons she feels are valid is nevertheless not a great plan.


Ha

 

[Buckeye]

I did taxes way back when..... well, when I was young...

I never did file a MFS return, so do not know for sure.... I just want to point out that Federal taxes do not have to follow state laws... So if you have read that she can claim 100% of her income and he claim 100% of his... then it is probably correct...

I would not split the deductions..... whoever paid should take the deductions...

Reading Pub 555, the fact that WA is a community property state affects how residents must file their federal taxes. WA has no state income tax. I was just going to file her normal MFS (doing a what-if return) but my TaxAct program displayed a note that community property states had different rules when it came to reporting income and referred me to Pub 555.

As far as I can tell, splitting the mortgage interest and property taxes 50/50 is pretty cut and dried because the deduction arises from community property. It's very frustrating, but it's pretty clear he gets half.

Claiming the dependency exemption and the child tax credit also seems pretty cut and dried. The fact she made all the mortgage payments and paid health insurance for her daughter makes a clear case that she provided over 50% of her daughter's support.

The only question left is her income. Is it only 100% of her W-2 or 50% of her W-2 plus 50% of his income (ha!) for the year?

 

[Buckeye]

Two things, the state has nothing to do with it. And neither does their supposedly separate lives. If I understand you, they live together. That is it, they are married and they live together, therefor they are married. Their filing status must be either married filing jointly, or married filing separately.

If she makes most of the income, she is almost certainly better off MFJ than MFS. Is she worried that he is hiding income? If not, just declaring that "I am done filing jointly" will cost her more than she realizes. MFS returns attract more audits than mfg also. Surely if she can stand to live in the same house with him, she could stand to file a joint return? Just use a tax preparer to get the information from both of them. https://turbotax.intuit.com/tax-too...ple-File-Jointly-or-Separately-/INF20239.html



Ha

The problem is that she does not get the benefit of the potentially larger return that results from MFJ versus MFS. Since he has a business return, his tax prep fees are outrageous compared to hers being free. In addition, the self-employment tax and federal tax he owes consumes her withholding and any credits that might have been received as a refund. Basically, she is paying for all his taxes and tax prep when she files MFJ.

Last year he took the refund (what little that was left after all his taxes and prep fees were paid) and gave her nothing.

There is no reason to take on any of his business return risk when there is absolutely no benefit.

I wish there was no difference in the way a federal return is prepared in a community property state but Pub 555 tells me otherwise. She deserves to get all the mortgage interest and property tax deduction AND claim her daughter! She would itemize so he would have to...with nothing to itemize. He would be up a creek without a paddle when it came time to file...which for him is usually April 14th.

 

[kaneohe]

It would be simpler if they lived apart......see p.8 here http://www.irs.gov/pub/irs-pdf/p555.pdf
which suggests they could keep their finances separate.

Perhaps they could have a partition in the house that provides some physical separation.

 

[Texas Proud]

Reading Pub 555, the fact that WA is a community property state affects how residents must file their federal taxes. WA has no state income tax. I was just going to file her normal MFS (doing a what-if return) but my TaxAct program displayed a note that community property states had different rules when it came to reporting income and referred me to Pub 555.

As far as I can tell, splitting the mortgage interest and property taxes 50/50 is pretty cut and dried because the deduction arises from community property. It's very frustrating, but it's pretty clear he gets half.

Claiming the dependency exemption and the child tax credit also seems pretty cut and dried. The fact she made all the mortgage payments and paid health insurance for her daughter makes a clear case that she provided over 50% of her daughter's support.

The only question left is her income. Is it only 100% of her W-2 or 50% of her W-2 plus 50% of his income (ha!) for the year?

Well, if you read the Pub 555 as you mentioned.... the dependent is up in the air... they give an example of three kids.... and say that they have to agree on who gets to take them....

Income also seems cut and dried.... if it is community income (which W-2 is) then it is split 50/50....


This is interesting reading and not what I expected....

To the OP... if they file, then all community items will be split and the child will be claimed by one of them... you did not mention if there is separate property that would produce separate income... but if there is then it is claimed by the person who owned the property...

I learned something today

 

[donheff]

One statement you made but did not seek comments on- I am not at all sure that a house must be sold immediately on divorce. Unmarried people own property together all the time. Time is ticking away on her life, her husband's life, and their daughter's life. It may be that spinning out this arrangement for whatever reasons she feels are valid is nevertheless not a great plan.


Ha

+1 and +1 to consulting an accountant and an attorney. My BiL lived apart from his wife for about 12 years prior to divorce. He remained married because it was easy and he felt it was helping the kids to keep her on his Federal health insurance (the kids would stay on regardless of divorce). He maintained the house, provided support and she did not work for the first few years. After more than a decade he fell in love and remarried necessitating a divorce. At about the same time his ex-spouse married a relatively wealthy guy. Unfortunately BiL discovered had to give his ex-spouse half of the Federal pension he had earned to that date (5 years real marriage and 12 years sham). Had he divorced after 5 years marriage he would have given up only half of the first five years. By the time he retires the difference will amount to handing over around $25K/year rather than the ~$7.5K/year he should be paying. These decisions have consequences.

 

[Buckeye]

Well, if you read the Pub 555 as you mentioned.... the dependent is up in the air... they give an example of three kids.... and say that they have to agree on who gets to take them....

Income also seems cut and dried.... if it is community income (which W-2 is) then it is split 50/50....


This is interesting reading and not what I expected....

To the OP... if they file, then all community items will be split and the child will be claimed by one of them... you did not mention if there is separate property that would produce separate income... but if there is then it is claimed by the person who owned the property...

I learned something today

So what is your take on the section titled, 'Community Property Laws Disregarded' on page 7? I know you are not an expert and I'm not taking your response as that of an expert. I'm just wondering what you think after reading that section, especially the second paragraph with the bold title, 'Certain community income not treated as community income by one spouse.'

 

[Buckeye]

If I understand you, they live together. That is it, they are married and will be married on December 31, 2014. They also live together, so they fail the test that would allow them to each file single. Their filing status must be either married filing jointly, or married filing separately.

If she makes most of the income, she is almost certainly better off MFJ than MFS. Is she worried that he is hiding income? If not, just declaring that "I am done filing jointly" will cost her more than she realizes. MFS returns attract more audits than mfg also. Surely if she can stand to live in the same house with him, she could stand to file a joint return? Just use a tax preparer to get the information from both of them. https://turbotax.intuit.com/tax-too...ple-File-Jointly-or-Separately-/INF20239.html.


One statement you made but did not seek comments on- I am not at all sure that a house must be sold immediately on divorce. Unmarried people own property together all the time. Time is ticking away on her life, her husband's life, and their daughter's life. It may be that spinning out this arrangement for whatever reasons she feels are valid is nevertheless not a great plan.


Ha

Regarding the forced sale of the home - There is no other way to get him out of the house other than selling it. He can't afford the mortgage or afford rent anywhere else. He's a leech and a leech needs a host to survive. We keep hoping he will move in with his girlfriend but no luck so far.

If my sister moved out, BIL could not maintain the Chapter 13 mortgage payments (yes, another twist, about 2 years in) and the house would be gone in no time. That would be tragic because there is significant equity in the home. BIL really can't leave the house because he doesn't make enough money to pay the high Seattle rents. My sister probably wouldn't be able to pay all the costs related to owning a home AND the mortgage and taxes without taking in borders which is not a likely scenario as it is not a very big house.

This is why I say the house would have to be sold if they divorced (or even physically separated) and one or both went their own way.

 

[Buckeye]

+1 and +1 to consulting an accountant and an attorney. My BiL lived apart from his wife for about 12 years prior to divorce. He remained married because it was easy and he felt it was helping the kids to keep her on his Federal health insurance (the kids would stay on regardless of divorce). He maintained the house, provided support and she did not work for the first few years. After more than a decade he fell in love and remarried necessitating a divorce. At about the same time his ex-spouse married a relatively wealthy guy. Unfortunately BiL discovered had to give his ex-spouse half of the Federal pension he had earned to that date (5 years real marriage and 12 years sham). Had he divorced after 5 years marriage he would have given up only half of the first five years. By the time he retires the difference will amount to handing over around $25K/year rather than the ~$7.5K/year he should be paying. These decisions have consequences.

I guess the question could come up as to whether she might have to pay him support. He can't say he stayed home with the kids because even when he worked from home, the kids went to daycare after school (funded by mom). I'm assuming that would be less likely if the youngest child was graduated and on her own. You might see my sister on the show 'Snapped' if a judge ruled she had to pay him support!

 

[pb4uski]

....This is why I say the house would have to be sold if they divorced (or even physically separated) and one or both went their own way.

Is it possible for them to divorce and for her to buy out his half of the equity by refinancing? Most leeches are short sighted and if he were getting a big slug of money from the house equity it might incentivize him to agree to the deal to a divorce. If a couple years later he has blown through what he gets, so be it.... at least she'll be rid of him.

I had a friend in a similar situation abut 10 years ago and ended up loaning him what he needed to get rid of his ex. He now understands it is the best money he ever spent.

 

[Buckeye]

Is it possible for them to divorce and for her to buy out his half of the equity by refinancing? Most leeches are short sighted and if he were getting a big slug of money from the house equity it might incentivize him to agree to the deal to a divorce. If a couple years later he has blown through what he gets, so be it.... at least she'll be rid of him.

I had a friend in a similar situation abut 10 years ago and ended up loaning him what he needed to get rid of his ex. He now understands it is the best money he ever spent.

I don't think he would jump at a payout. He told his daughter that he and his girlfriend were going to fix the house up really nice when they were finally living there. Long term possession of the house is actually more important to him than it is to my sister. I guess he thinks he and girlfriend will take over payments on the loan that has my sister's name on it. Take another hit off the bong, dude!

 

[Texas Proud]

So what is your take on the section titled, 'Community Property Laws Disregarded' on page 7? I know you are not an expert and I'm not taking your response as that of an expert. I'm just wondering what you think after reading that section, especially the second paragraph with the bold title, 'Certain community income not treated as community income by one spouse.'

That to me is a catch all.... IOW, if you have community income and do not tell your partner how much they are supposed to report.... you have to report 100%...

 

[Buckeye]

That to me is a catch all.... IOW, if you have community income and do not tell your partner how much they are supposed to report.... you have to report 100%...

Reporting all of her income on her MFS return would be just fine with her (and how I want to interpret this section of Pub 555). I don't know how he could complain (to her or to the IRS) because claiming 100% of her W-2 income causes her to pay additional taxes over the 50/50 situation.

And how could he complain about getting 50% of the mortgage interest and property taxes?

He will complain about losing the dependency exemption and the child tax credit but he did not provide over 50% of his daughters support...and that can be documented.

One of my Seattle girlfriends just told me she has a retired cousin who is a CPA who used to do tax prep. She is going to introduce him to me and we'll get the REAL story of how this should be handled!

 

[Bestwifeever]

I don't think he would jump at a payout. He told his daughter that he and his girlfriend were going to fix the house up really nice when they were finally living there. Long term possession of the house is actually more important to him than it is to my sister. I guess he thinks he and girlfriend will take over payments on the loan that has my sister's name on it. Take another hit off the bong, dude!

She should just continue filing jointly for the next couple of years until the daughter graduates and they can get divorced and sell the house.

That sounds like an absolutely horrendous situation for the daughter to have grown up in. I bet she wishes they had divorced a long time ago. The tension in the house must be awful.

 

[growing_older]

I am not at all sure that a house must be sold immediately on divorce. Unmarried people own property together all the time.

Divorce decrees can do all kinds of creative things with joint property such as a family home. It is not uncommon for the house to be awarded to one party with payout to the other, but it is also not uncommon to leave the property in joint ownership with all expenses to be paid by one party in possession, and a payout with sale required at a future date, such as when youngest child graduates high school.

What is uncommon is for a divorce decree to specify that both parties remain in the house. If she wants to force him to vacate, then a divorce will likely accomplish that at least, at some risk that they both might need to find new housing. A lawyer could help her assess the likelihood of being able to retain the house.

 

[Moemg]

I would look for an enrolled agent . They are former IRS agents who do taxes . I filled MFS several times when I was married and it was pretty straight forward .My husband was an IRS agent so he knew all the rules . I claimed just my income and half the mortgage & taxes and one child .Our returns were sent directly to the IRS ( since he was an agent ) and we were never audited. We were happily married at the time just needed to do this for children's college applications .

 

[Buckeye]

She should just continue filing jointly for the next couple of years until the daughter graduates and they can get divorced and sell the house.

That sounds like an absolutely horrendous situation for the daughter to have grown up in. I bet she wishes they had divorced a long time ago. The tension in the house must be awful.

Actually, he's a pretty decent dad if you don't include the requirement to ensure the family is provided for adequately. My sister has let the kids figure out on their own the kind of man their dad is. She does not interfere in their relationships. There's no more tension now than there was 20 years ago. In fact, there is probably less tension in the last few years given the fact mom and dad have some positive relationships/interests outside the home. The crushing stress is financial and that has been there forever.

 

[Buckeye]

I would look for an enrolled agent . They are former IRS agents who do taxes . I filled MFS several times when I was married and it was pretty straight forward .My husband was an IRS agent so he knew all the rules . I claimed just my income and half the mortgage & taxes and one child .Our returns were sent directly to the IRS ( since he was an agent ) and we were never audited. We were happily married at the time just needed to do this for children's college applications .

Were you in a community property state?

 

[aja8888]

Actually, he's a pretty decent dad if you don't include the requirement to ensure the family is provided for adequately.

I was under the assumption that a "decent dad's" highest priorities include adequately providing for the family.

 

[Moemg]

Were you in a community property state?

AN equitable property state .New Jersey