Federal tax married filing jointly, AZ state (community property) tax married filing separately

[1cooldudeinAZ]

Hi Folks,

I am running into difficulty with using TurboTax CD for a "Federal tax married filing jointly, AZ state (community property) tax married filing separately" scenario.

1. For 2021, I was a married resident of AZ, which is a community property state.

2. My wife worked in AZ for 10 months of 2021, then moved to TN for work (I remained in AZ for the balance of the year). TN had no income tax in 2021.

My understanding is that my wife would need to file a part-time AZ resident tax return on her AZ earnings, and I need to file a separate resident AZ tax return. We will file a joint federal return. I read the instructions on how to use TurboTax for separate state return filing using mock federal returns.

What I am unclear on how to correctly deal with TurboTax adjustments to income due to AZ being a community property state. I understand that each person's income is 1/2 of combined couple income. Since this adjustment would not match W-2s, I wonder how to do this properly. While theoretically there should be tax savings due to AZ not taxing her TN earnings (and no TN state income tax), I wonder if TurboTax is robust enough to prepare a proper filing that would stand up to an audit.

Appreciate your expert thoughts!

[DMarkM1]

The simplest way to handle this is to file a federal joint return and a joint part-year return for AZ.  For both of you in the "My Info" section select TN as your resident state oon 31 Dec and indicate the date moved to TN for each of you (you could use 31 Dec for you).  This will generate the AZ part-year return.

In that AZ part-year return you will allocate to AZ only the items that belong to AZ.  All your wages for the year but only the AZ portion of your spouse's wages.  

That may already be done using W2s.  The TN income may already be on a separate W2 and not have an AZ state line (boxes 15-17) and thus will not show up in the AZ return.   

[1cooldudeinAZ]

Thanks DMarkM1!

I did not move to TN in 2021, only my wife did. Given that, would we be able to file MFJ part-year resident return ?

I am still in AZ, pending change in employment. I may or may not be part-time resident in AZ for 2022, but my wife will be TN resident for all of 2022. How do we file AZ taxes then?

appreciate your thoughts!

[JulieS]

I think DMarkM1's approach would work for 2022 as well. It is the simplest approach to spouses who have different state residencies. 

[1cooldudeinAZ]

Thanks JulieS,

I agree that it makes sense for the “spirit of the law”, since AZ will get all the taxes due to it. However, I wonder if this meets “letter of the law” intent in case of an AZ state audit. If this is such a great solution, why does TurboTax recommend a federal MFJ/ state MFS filing for folks in this situation?

[DMarkM1]

The situation is slightly different.   The steps to file a federal joint and state separate are normally used when one or the other spouse never was a resident of one of the states.  In cases of both being at least part-year residents, you can file part-year returns and will meet the state law.  

[1cooldudeinAZ]

Which address should be used for AZ part time resident joint return filing - AZ or TN? Again, I am still in AZ and have AZ address for the federal return.

[LenaH]

Per the State of Arizona, use your current home address. The department will send your refund or correspond with you at that address. 

@1cooldudeinAZ

[1cooldudeinAZ]

Thanks. Does AZ state care if I use AZ home address when filing joint part-year resident return? As I was advised by the first 2 Employee Tax Experts, it's ok to file joint part-year resident return to account for different states of residency for husband and wife. 

[1cooldudeinAZ]

Hi DMarkM1,

Thanks for your advice earlier this year. My wife's job in TN ended, and she returned to AZ in Q3 2022.

I assume that, for 2022, we will follow the approach you originally recommended: joint Federal return and joint part-year Arizona resident state return. The question I have is whether we could give to charities AZ tax law provides for with tax credits. If so, can we donate the maximum amount of the tax credits, or is it pro-rated on account of not being full year residents?

Thank you.