How to report PYEI if I elect to use it for EITC but 2019 was joint return and in 2020 I'm divorced head of household?

[DeanieO]

Should I file form 8958 when I list my 1/2 of the (married joint) 2019 PYEI in my look back for my 2020 EITC in my (divorced/head of household) return in a community property state? If I enter only my 1/2 of the 'community property' that was our married joint earned income from 2019 when I elect to use PYEI will Turbotax include form 8958? 

[AmeliesUncle]

This doesn't specifically address the prior year option, but the USUAL rule is if you are are currently married during the year BUT you qualify as Head of Household (you don't live with with your spouse), that your "Earned Income" for purposes of EIC is ONLY YOUR income.  It does NOT include any Community Property Income adjustments for your spouse.

Logically, the same applies for the Prior Year Earned Income.

If you are married, but qualify to file as head of household under rules for married taxpayers living apart (see Pub. 501, Dependents, Standard Deduction, and Filing Information), and live in a state that has community property laws, your earned income for the EIC doesn't include any amount earned by your spouse that is treated as belonging to you under community property laws. That amount isn't earned income for the EIC, even though you must include it in your gross income on your income tax return. Your earned income includes the entire amount you earned, even if part of it is treated as belonging to your spouse under your state's community property laws.

https://www.irs.gov/publications/p555#en_US_202001_publink[phone number removed]

[DeanieO]

Your guidance facts apply to married individuals filing separately under special rule for filing as head of household.

That is not my situation. Specifically, you note rules for the earned income for the EIC if I am married. I did not try to file as head of household while married and I am not married now

"If you are married, but qualify to file as head of household under rules for married taxpayers living apart (see Pub. 501, Dependents, Standard Deduction, and Filing Information), and live in a state that has community property laws, your earned income for the EIC doesn't include any amount earned by your spouse that is treated as belonging to you under community property laws. "

The facts applicable in my case (and ALL these facts are pertinent to lead us to the correct answer) I was married (in 2019, the PYEI I'm looking back to) and while married I filed jointly. But now, in the 2020 tax year where I have this question, I am not married. I am divorced head of household filing as an individual and have lived all these years in a community property state. 

Pub 555: Community income.

Generally, community income is income from:

• Community property;

• Salaries, wages, and other pay received for the services performed by you, your spouse (or your registered domestic partner), or both during your marriage (or registered domestic partnership) while domiciled in a community property state

Pub 504:

 Ending the Marital Community
When the marital community ends as a result of divorce or separation, the community assets (money and property) are divided between the spouses. Each spouse is taxed on half the community income for the part of the year before the community ends. However, see Spouses living apart all year, earlier. Income received after the community ended is separate income, taxable only to the spouse to whom it belongs.

My married 'community' ended by state laws according to an agreement entered into on 1-1-2020. So what was all our joint income in 2019 seems to be according to the IRS all community income, and that includes wages earned by both of us.  And so at  end of that marital community according to the IRS it seems to me that half of that joint/community income from 2019 is mine to look back to and report as a tax individual now filing my 2020 return (and also all my individual earnings for 2020 are mine alone in this same tax filing)

You point out a circumstance suggesting somehow all of that ceases to be true with regards to the Earned Income Credit, but Pub 596 doesn't tell me definitively what to do in my case, and especially not in the PYEI look back situation. 

"You can elect to use your 2019 earned income to figure your 2020 earned income credit (EIC) if your 2019 earned income is more than your 2020 earned income. "

That is my situation (but only if my PYEI is 1/2 that joint/community income)

I'm not seeing any IRS explanation or reason not to divide 2019 joint/community earned income in half to report it as my PYEI (divided up community property post divorce) as I elect to look back to claim the EITC in 2020 .

And, form 8958 says it's for married persons. In 2019 I was married but in tax return year 2020 I am not but I am nevertheless needing to explain to the IRS how I'm dividing the community income from 2019 in my PYEI. So should I file it with my non-married 2020 tax return? I'm thinking better more information/explanation than less? So I'll file it?

Does anyone here know HOW to get the IRS to research and give a definitive answer? I am frustrated not to be able to ask the folks who will assess if my tax return will or will not be accepted if I do it this way or not. And does anyone know if I do this and IRS decides its an error for me to claim 1/2 the income from 2019, will I suffer the "denied or reduced for any reason other than a math or clerical error" issue? I don't want to be prevented from future earned income credits because of my misunderstanding their laws that they refuse to give me a means to ask a question about. I'm not trying to cheat, I'm trying to do the right thing as well as maximize my credit in a current year of truly awful earnings.

[AmeliesUncle]

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@DeanieO wrote:

Your guidance facts apply to married individuals filing separately under special rule for filing as head of household.

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That is because Community Property rules only apply if you are married.  As I said, the citation I showed you is for the USUAL rules of determining your Earned Income during the CURRENT year.  Those rules show that "Earned Income" is based on your ACTUAL income, not Community Property rules.

The tax code specifically says that for purposes of the Earned Income Credit that "Earned Income" is "computed without regard to any community property laws".

[DeanieO]

Yes, but under Rule 3. And logic tells us that's because the IRS is saying that though 'married' these spouses are in fact living apart and in essence there is likely little to no community combination of income as that spouse living part isn't participating in life of the married community. That is not my situation. And yes, I understand hat 'community property' applies to those assets or debt acquired within the community of the married life but it also very much applies to the act of getting divorced. At divorce, each ex takes 1/2 and goes their separate and equal way. And although I very very much appreciate your answers as well as your staying with me on this until I fully understand what to do, or keeping this thread active until it catches notice of others in my situation demanding the IRS provide a definitive example and answer, I'm seeing that this still isn't answered because my situation is not the USUAL and is also not the CURRENT year.  If they are going to create a look back for the EIC that EIC Pub ought to be revised to cover the possible permutations.  And divorces this year are most certainly UP, income is most certainly DOWN, so I'm not alone.

[AmeliesUncle]

Read my last sentence above.  That clearly answers your situation.

[DeanieO]

OK, gotcha. Searching your sentence, I was able to look up both 26 U.S. Code § 32 - Earned income for definitions and the new law discussing the look back, the Consolidated Appropriations Act 2021.

From the latter, this is the part that finally and definitively answers my query (and for anyone else reading this):

SEC. 211. TEMPORARY SPECIAL RULE FOR DETERMINATION OF
EARNED INCOME.
(a) IN GENERAL.—If the earned income of the taxpayer for
the taxpayer’s first taxable year beginning in 2020 is less than
the earned income of the taxpayer for the preceding taxable year,
the credits allowed under sections 24(d) and 32 of the Internal
Revenue Code of 1986 may, at the election of the taxpayer, be
determined by substituting—
(1) such earned income for the preceding taxable year,
for
(2) such earned income for the taxpayer’s first taxable
year beginning in 2020.
(b) EARNED INCOME.—
(1) IN GENERAL.—For purposes of this section, the term
‘‘earned income’’ has the meaning given such term under section
32(c) of the Internal Revenue Code of 1986.
(2) APPLICATION TO JOINT RETURNS.—For purposes of subsection (a), in the case of a joint return, the earned income
of the taxpayer for the preceding taxable year shall be the
sum of the earned income of each spouse for such preceding
taxable year.

The KEY words are in the sentence that reads:  "For purposes of subsection (a)"

Subsection (a) is the applicable section referring to the prior year look back. What therefore is the conclusion I draw is that "in the case of a joint return," (which now I may credibly interpret as when back in 2019 I filed a joint return) "the earned income of the taxpayer" (take note 'the taxpayer' is singular, so this applies to my situation as an individual filer now on 2020) "for the preceding taxable year shall be the
sum of the earned income of each spouse for such preceding taxable year." MEANING: If I were to elect to use PYEI prior year earned income from 2019 in my 2020 return, I am, even as a now-divorced head of household taxpayer in 2020, forced to enter as my PYEI the entire joint sum amount originally reported in 2019 for both spouses.

So, I said this to clarify for anyone who might erroneously conclude from prior discussions that if comunity property does not apply that their individual PYEI is only the income they themselves 'earned' in 2019. That would be incorrect.

Equally incorrect would be any notion that ‘community property laws’ would some how divide the PYEI in half giving ½ now to each spouse taking the PYEI look back. As correctly noted by others, 26 U.S. Code § 32 tells us specifically that for purposes of the Earned Income Credit that "Earned Income" is "computed without regard to any community property laws".

Turns out first answer was the best answer!

THANKS SO MUCH TO ALL WHO CONTRIBUTED HERE! You're the best!!

[alicemrdic]

@DeanieO I am having the same issue. I amended my 2021 taxes to add a deduction for my son's tuition that I forgot to put. Expecting to get an additional refund, but instead I got a tax bill for $3600. The notice said that my EIC had been reduced from $5960 to $1000 something, but didn't say why. I called the IRS and they told me that this was because when I claimed my 2019 PYEI for 2021, I only claimed my portion ($15,009), when I should have claimed $35,000, which was my then husband and my income combined. Like you, I was married filing jointly in 2019 and HOH in 2021. This came from the IRS agent I spoke to, but I don't know if she is right. The way you explain it, it seems logical that we would only use OUR personal part of the earned income from 2019. But I can't find any place where this is clarified either way. It seems like we would not be the only ones who have this issue, obviously. Did you ever find it written anywhere?

[AmeliesUncle]

The IRS agent was wrong.  You only use your earned income.  Maybe the amendment didn't 'see' that you had elected to use your 2019 Earned income?  Your 2019 earned income was higher than it was in 2021, right?

While not directly saying you only use your income, the law itself implies it.  It say that if you file a Joint return, you would add your earned income to your spouse's earned income.  That effectively means if you don't file a Joint return, you only use your earned income.