MFS in CA, TurboTax doesn't calculate taxes properly

[i66d]

We are filing MFS, California residents. I'm using TT Premier, Desktop for Mac.

The problem: We both have 1099-INT and 1099-DIV forms. I imported the data from our brokerage into the respective separate TT returns. I also have W-2 and 1099-B income (cap gains). These were imported in my return only. I calculated an AGI amount we need to arrive at since CA is a community property state (add both AGIs, divide by 2 and determine the plus/minus amount to enter on the Community Property Income Adjustments page). This way I was able to get our AGIs to match. I would've expected that TT will total (separately) our dividend, interest, wages and capital gains, then split equally for the purposes of determining our due taxes. Surprisingly, that's NOT the case. TT kept everything separately (form 8958) and calculated vastly different amounts of tax on our MFS returns. If everything is split 50:50, I expect that taxes to be the same too... Reverse-engineering a bit, it seems like TT is treating the adjustment income which we added to the return with lower original AGI as general income... and taxing it that way instead at the preferential rates for cap gains (for example).

How can I fix this? I spoke with Cust Support multiple times and they weren't able to help. Splitting the various amounts by sources of income in TT doesn't help. There's a note in the app stating that changes on those pages (community property related) won't affect the tax calculations and the listings are for informational purposes only. I purchased the TT desktop app specifically to be able to file MFS :-(.

[RobertB4444]

So the problem that you have is that you are trying to file married filing separately and do two tax returns together.  That isn't going to work.  You'll need to separate the two tax returns and do all of the data entry twice.  Don't roll over the data from last year, either.  The system will be looking for a spouse if you filed jointly last year.  To file separately you actually have to create the returns separately.

[i66d]

Right, I created two separate returns - each including only the income/expenses etc for one of us.

As per the response to my question in another discussion thread, I was advised to:

- create two separate returns (as I'm already doing)

- enter ALL (both spouses) income and expenses in BOTH returns, but split the amounts in half (50:50 since CA is a community property state)

- leave any SS or Medicare amounts (W2 forms) alone, those are NOT supposed to be split

- fill form 8958 to show how I've allocated the income across both returns

That way I can attest that TT is doing the right tax calculations. I was worried that the various amounts in the returns won't match the 1099 amounts, but this seems to be the only possible way to arrive at correct tax calculations while also splitting income, expenses etc 50:50 to satisfy CA tax code.

One more question: I have a rental property which generated income. I'll be splitting that income and the related expenses 50:50 to both returns and that follows the above logic, no problem. The only aberration concerns handling the depreciation of that unit. Since I've acquired it before marriage, my understanding is that the depreciation "follows the property and affects its basis when sold", therefore the depreciation must NOT be split between both reports (so, it is 100% applied to my report). If somebody could confirm this approach, I'd appreciate that very much. Thanks!

[DianeW777]

Do not be concerned about the entries not specifically matching the various 1099s. Please refer to details provided by @ReneV4  and posted below for you and in this link. 

1. Go back to the Community Property section in both returns and remove the plus/minus adjustments you created so that your adjustment line on your 1040s are $0
2. Next, manually split the income sources
3. For every 1099-DIV, 1099-INT, and 1099-B, divide by 2
4. Enter 50% of the dividends/gains on your return and 50% on your spouse's return
5. Enter both W-2s on both returns, but only input 50% of the values for Box 1 (Wages), Box 2 (Federal Withholding), etc.
6. Note: Keep Social Security and Medicare boxes (3–6) matching the original W-2 for the person whose name is on the form
7. Use Form 8958 to reconcile, since your entries won't match what the IRS received from the banks/employers
8. In TurboTax Desktop, go to Forms Mode and open Form 8958
9. List the full amount in the "Total" column and show the 50/50 split between Spouse A and Spouse B to tell the IRS, "The 1099-DIV says $1,000, but because of CA law, I am only reporting $500."

Since rents must be reported equally between you, then the expenses should be split as well. However, see the note below if only one of you owns the property.

Income from separate property.

In some states, income from separate property is separate income. These states include Arizona, California, Nevada, New Mexico, and Washington. Other states characterize income from separate property as community income. These states include Idaho, Louisiana, Texas, and Wisconsin. IRS Publication 555

@i66d