Using Form 8958 with married filing separately in community property states

[Ready]

This is a new one for me. Taxcut is requiring me to fill in form 8958 because I'm married filing separately. It appears to be a requirement for married filing separately in community property states. However we've been filing this way for four years now and this is the first time it's come up. Does anyone have any idea on why this is happening to me? Is it a new rule? If not, why didn't the prior three years of Taxcut and Turbotax software we used mention it?

 

[cathy63]

I just ran a quick test with TTax 2017 and it did generate form 8958. It also pointed me at pub 555 and urged me to read it on three different screens.

If you answer the below question "No", then form 8958 is blank, i.e. all the income you entered is treated as separate (I didn't enter a W2, which would always be community income). If you answer "Yes", then it takes you through some additional steps.

 

[jkern]

I'm not sure about the software, but I file MFS in CA and file form 8958 every year.

 

[Ready]

Are we required to split our income across both returns or can we just each file the income that was paid under our individual names?

 

[cathy63]

Are we required to split our income across both returns or can we just each file the income that was paid under our individual names?

Assuming you both live in community property states and you don't qualify for the "innocent spouse" relief provisions, then at a very high level:

- If either of you has a W-2 or files a Sched C, you must split that income.

- If you purchased any investments with money that you earned by working while married, then earnings and cap gains from those investments must be split.

- If both of you only have income from investments or rental property that you acquired before marriage then you don't have to split anything.

It's almost always a lot better to file MFJ, especially if you live in a community property state, so if you now realize that you have income that should have been split in the past, you might want to see if amending your previous returns to an MFJ status would save you a significant amount of money.

 

[Ready]

Cathy, thanks for the detailed explanation. You’ve given me a lot to think about.

 

[jkern]

Are we required to split our income across both returns or can we just each file the income that was paid under our individual names?

Actually, there are exceptions to splitting earned income on your 1040 in a community property state like CA. If you have a prenup that states all earned income is separate property, then you only claim your earned income on your 1040 when filing MFS.

 

[Ready]

Actually, there are exceptions to splitting earned income on your 1040 in a community property state like CA. If you have a prenup that states all earned income is separate property, then you only claim your earned income on your 1040 when filing MFS.

Interesting. We don’t have a written prenup but we’ve always done in that way. I wonder if they would accept a postnup if we ever got audited.

 

[jkern]

Interesting. We don’t have a written prenup but we’ve always done in that way. I wonder if they would accept a postnup if we ever got audited.

I would think a postnup would work for any future tax returns.