Community Property State Income

[Gail in Virginia]

Young man whose taxes I have been doing for a long time got married this year.  He has been living, and still lives, in TX with his wife.  She has already filed MFS for 2020, with a very small amount of income.  He has the larger income, although the loss on his horse ranch offsets a good bit of it.  How can she file without knowing his income?  Can I file without know hers?  There is no state return to worry about, but is allocating the income optional even though it is a community property state?  It is my understanding they are filing separate just to keep things separate, but is that even possible in a community property state?  Am i over my head and need to refer him to a TX preparer? 

Can I have a zoom wine party with Possi tonight?

[Margaret CPA in OH]

Can I have a zoom wine party with Possi tonight? Can I come, too? 

[Lion EA]

They would have community property from the date of their marriage in 2020 to the end of the year, on such income items that are community by TX definition. That's all I got. Hope a TX preparer jumps on here.

[Lynn EA USTCP in Louisiana]

Ask them if they have a prenup delineating property separation. 

[Gail in Virginia]

Thanks, Lynn, I will check about the pre-nup.  If I understood correctly, her income was from before they got married but his was through out the year.  So if he reports all of his income this year, even though technically some of it would be hers under community property rules, will that be a problem?  And then next year address this issue by either reporting correctly or filing jointly?

[BulldogTom]

Years ago I had an IRS RO tell me that the best way to get an audit letter is to do the 50/50 split of income on MFS returns in a community property state.   He said that since none of the documents would match up with the taxpayer (W2, 1099, etc.) it almost always ended up in a letter to both spouses.  He said that if each spouse took their income onto their own returns, there would almost never be an audit.   Not sure if this was true, but I thought it was interesting.  

Tom
Modesto, CA

[Max W]

4 hours ago, BulldogTom said:

Years ago I had an IRS RO tell me that the best way to get an audit letter is to do the 50/50 split of income on MFS returns in a community property state.   He said that since none of the documents would match up with the taxpayer (W2, 1099, etc.) it almost always ended up in a letter to both spouses.  He said that if each spouse took their income onto their own returns, there would almost never be an audit.   Not sure if this was true, but I thought it was interesting.  

Tom
Modesto, CA

From my experience, I think it was true.  But now, there is form 8958 to allocate the income and with Drake the returns can not be Efiled unless you use a workaround.        I have a few MFS clients who do not live together.  In some cases they do not even talk to each other, so how are you going to get the information.   

[Lion EA]

If the "community" has ended, then there's no more community property after that date. Don't know what you/your client can do about income during the part of the year before community ended.

[TexTaxToo]

The only way to end the community in Texas is by divorce, there is no legal separation.  Unfortunately, there are many abandoned spouses who for religious or other reasons do not want a divorce.  Practically speaking, I see no option but to report only their own income.  Legally, they remain liable for unpaid tax on their spouse's income, but they can claim innocent spouse relief if the IRS tries to collect.  What would you do?

As for the OP, I suspect as others have said, that as long as all income gets reported, it won't get flagged by the IRS.  However, if you comply, you are knowingly preparing an incorrect return.  Texas accepts prenups (and postnups - a signed spousal agreement) to reallocate community property - I would want them prepared by a lawyer.

[Gail in Virginia]

Since her income was earned before the marriage, and they were only married a few months last year, i went ahead and took my chances.  However, I suggested they get someone from TX who is more familiar with common law rules for next year, or else file jointly.