Community property adjustments for domestic partners - confirming understanding

[mscanadaexpat]

Just wanted to confirm I'm correctly understanding how to do the community property adjustment in the federal tax return for two individuals in a RDP in a community property state, filing as single.

Add up wages, interest income, dividends, state income tax refund, self employment income, subtract capital losses (max 3000), subtract any relevant deductions (e.g. charity contributions) across both partners and divide by 2 to determine what each partner's total income should be. Then the addition/ subtraction should be the difference between this allocated community property and the partner's adjusted gross income, correct?

[ThomasM125]

It might  be better to prepare each tax return before you make the community property income adjusment. If you do that, you can look at line 11 on each Form 1040 (adjusted gross income) and add those two amounts together and then divide by two. Then, use that number and subtract the amount on each partner's line 11 to determine the income adjustment.

Also, you will need to do a similar adjustment for the tax withheld form each partner's pay.

@mscanadaexpat 

{Edited 3/21/23 at 12:07 PM PST}

[nataliacanada]

Thank you, so not line 11 like I was initially thinking but rather line 15 in the 1040. Thanks again. 

In the adjustments section when it asks for federal and state withholdings, I'm assuming federal = federal taxes withheld and state = social security tax withheld + medicare tax withheld, is that correct? (off of the W2, and any 1099s where applicable). 

[nataliacanada]

Also on the allocations worksheet, should I essentially add up for both parties and then split into two? e.g. partner 1's dividends + partner 2's dividends and then split by two? 

Is it necessary to do this for HSA deduction if HSA is in one name (this qualifies as separate property I'm assuming). 

[nataliacanada]

And finally in the community property section within Turbotax where it's asking for me + my partner, here I should input as is, not allocate across the two correct?

[nataliacanada]

At the end of it all, the two partners' incomes don't necessarily need to equal each others, correct, in case eg there's an HSA adjustment in one and not the other. They're close but not equal.

In form 8958 of the TT state return currently items are not allocated 50/50, but reported as they were incurred. Is that correct?

[nataliacanada]

Shouldn't it actually be based on adjusted gross income, prior to any deductions taking place? That's what the literature seems to indicate.

[BillM223]

How the HSA is handled can depend on the state you are in (I did not see it mentioned - did I miss it?). An HSA, as you seem to know, is like an IRA in that it is an account owned by the individual (no joint HSAs or IRAs). So unless your state law dictates otherwise, keeping the HSAs separate seems best.

[nataliacanada]

Thanks =). This is California. Should income then just be wages + dividends + interest + capital gains / loss - HSA contributions to come to the community property income? 

[BillM223]

Aha! HSA contributions are not deductible in California. Instead the HSA is treated like a regular investment account (you two share the income from it, just like from any mutual or investment fund account). The contributions to the HSA are not deductible so don't apply to your community income.

Make sense?

[nataliacanada]

Makes sense =).

HSA contribution is reduced from income for federal taxes, to my understanding and for California state TT should be able to treat it correctly, since there I can just use the MFJ version of TT. 

Essentially for the federal returns, do I figure out each partner’s income as: wages - capital losses - HSA contribution + dividends + interest. Sum up across the two partners and then divide that by two, and make that an addition / subtraction in the community income adjustment screens? Does that mean each partner can take up to 3000 capital loss against their taxes individually?

[BillM223]

I would not think that you would get to, in essence, double the capital loss carryover from $3,000 to $6,000 by spreading it over two taxpayers, but let's see if we can get Thomas to come back and give us his thoughts.

@ThomasM125 

@nataliacanada 

[yamavin]

For me and my partner living in California, this conversation is very timely and informative.  Thank you! Can I ask the TurboTax experts to do with community property social security benefits splitting when  the social security benefits taxable amount changes as adjusted gross income changes after adjusting for community property split?  What I'm encountering is after I split out taxable social security benefit when calculated separately, the taxable social security benefit has changed because the adjusted gross income has changed.  Ugh! I'm thinking that I don't need to do anything about it caused there's nothing I can do.  It just looks strange when I fill out the form 8958 showing the income allocation and the social security benefit taxable amount no longer matches what's showing on 1040 line 6b taxable amount.  Please ease my anxiety cause it makes me crazy things not matching.   

[ThomasM125]

Per the instructions of IRS publication 555 Community Property, social security benefits belong to the spouse who received them, they do not get split like other income items. Here is a link to the publication: IRS Pub 555 Community Property

So, you would not factor the social security benefits into the calculation of community property income.

@yamavin 

[nataliacanada]

At the end, once filing, are both partners' summaries supposed to look similar? i.e. my partner ends up with a total income, federal deductions and taxable income that are different than mine, though close. e.g. taxable income of 74K vs. taxable income of 78K. Deductions of 23K in one, and 20K in another. Is this ok?