You and your spouse cannot just split your income and deductions up any way you want in order to maximize the MFS tax savings. Instead, state law determines how you must divide up your income and deductions.
If you file a federal tax return separately from your spouse and you live in a community property state, you must report half of all community income and all of your separate income. Generally, the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes. Refer to https://www.irs.gov/publications/p555#en_US_201901_publink1000168769
Nine states have community property laws. Married couples in these states typically need Form 8958 if they file separate rather than joint tax returns:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
On Form 8958, a couple lists individual sources of income for each of them, such as employers, banks that pay interest, stocks that pay dividends, capital gains and tax refunds. The couple reports the total amount received from each source, then allocates a portion of the total to each person.
Form 8958 essentially reconciles the difference between what employers (and other income sources) have reported to the IRS and what the spouses will be reporting on their federal tax returns. Both spouses must include a copy of the form with their tax return.
In other states gains on assets that are jointly held can be allocated any way you like, but gains on assets held in one name only must be reported on the owner's tax return. You may allocate joint gains based in these states based on the proportions of income, or any other reasonable method.
Answers are correct to the best of my ability but do not constitute legal or tax advice.
