After reading various IRS publications, and discussions with Turbo Tax, I have found an answer to the issue.
The tax law allows for a married individual that meets the Head of Household condition to apply as HOH. Often these individuals have common property (investment property); however, the Turbo tax software is not equipped to handle this level of complexity.
Here are a few things to manually do which override the Turbo Tax system defaults and help you in filing your return:
- Allocate the percentage ownership for each of your investment property to 50% (assuming common property, joint ownership) and enter the full income and expenses for each investment property. Turbo Tax will calculate the income and Expense. Please follow Publication 555 for specific details, link listed below.
- Alternatively, you may choose to manually reduce the income and expenses by half (assuming common property, joint ownership) and leave the ownership percentage at 100%. Meaning you have to do the Math yourself.
- Important --- Turbo Tax WILL NOT give you the option to adjust the other deductions and credits such Depreciation, Mileage, other expenses, which you should also allocate equally (in the situation listed above)
After you have entered the information on your investment property (as noted above), Turbo tax will give you a review check error where the system does not understand why you are filing HOH, when Married, as the default should be either Married filing Jointly or Married filing Separately. This error is on the Schedule E Worksheet. The error will note that you cannot have a "Owned jointly" option ... this option is automatically filled by Turbo Tax.
.... So what to do about it? The only option to overide the system is to uncheck the box and rerun the smart review. The ownership information is not part of the Schedule E that goes to the IRS, and possibly a system check done by Turbo Tax that should be fixed, as the code has a bug, as noted in this post.
Please reference Publication 555 for tax guidance and please note that this post is not meant to be tax advice.
About Publication 555, Community Property | Internal Revenue Service (irs.gov)
