Community Property Income Adjustment - Does it affect AGI / IBR loan payments? Is it required? How do I enter it?

[gordonowski]

Here is my situation:

I have been married a little over a year. My wife is trying to use the Public Service Loan Forgiveness (PSLF) program to get her student loans forgiven. This program requires that she is on an income-based repayment (IBR) plan for 120 payments (10 years), which she is close to finishing. Our new marriage is complicating things. I make significantly more money than her. While we would save money on our TAXES filing jointly, we decided not to do that, because we did not want to disqualify her from her IBR / PSLF. Instead, we decided to file our taxes separately (MFS). Both of us make money primarily via employment and get W2s. The complication of this is that we live in California, which is a "Community Property" state. 

Here are my questions:

The IRS documentation makes it seem like wages (our primary source of income) could (or should?) count as community income. I know that simply reporting each other's income on our tax return is required (we can do this via Form 8958), and in Turbo Tax on the screen titled "Community Property - Wages." 

(Question 1) What I can't figure out is if doing the Community Property Income ADJUSTMENT is required, and if I would want to AVOID doing that adjustment if NOT required (given that I want to keep my wife's AGI low for the purposes of her loan forgiveness). 

(Question 2) If I SHOULD do the Community Property Income Adjustment in TurboTax, how the heck do I do it? There seem to be two screens where you enter the information for the adjustment, and I don't understand how to fill it out. From the viewpoint of my federal return, how should I fill out the following fields?

Screen 1 - Community Property Income Adjustments: (it sounds like there are a few ways to fill this out)

• Community Property Addition Adjustments: do I put my wife's W-2 box 1 here (wages) here? (she has no other income)
• Community Property Subtraction Adjustments: do I put MY W-2 box 1 here (wages) here? Should I include ALL income in this? 

Screen 2 - Tax Withholding Adjustments: 

• Tax Withholding Addition Adjustment (Federal / State) - do I put my wife's W-2 box 2 (federal income tax withheld) here for federal, and box 17 (state income tax) here for state?
• Tax Withholding Subtraction Adjustment (Federal / State) - so, first off, it won't let me put a positive number here, which is very confusing, considering that the previous screen's subtraction adjustment requires a positive number. If I do enter negative numbers, do I put my W-2 box 2 (federal income tax withheld) here for federal, and box 17 (state income tax) here for state?  

[Opus 17]

You need to reevaluate the entire concept.

I haven't done community property adjustments in Turbotax, @VolvoGirl or @Critter might be able to help with data entry.

But I can definitely tell you that half your income is your spouse's and half your spouse's income is yours.  If you file MFS for the next 10 years you will lose a number of important tax benefits.  Your ability to contribute to an IRA is severely limited, you lose the student loan interest deduction, the child and dependent care credit (when you have kids) and a number of other deductions and credits are disallowed or reduced.

https://turbotax.intuit.com/tax-tips/marriage/should-you-and-your-spouse-file-taxes-jointly-or-separ...

So you are looking at paying a possibly significant tax penalty for 10 years on the promise that you might qualify for partial forgiveness of the loan.  The most recent data is that 2% of applications for loan forgiveness have been approved.  Reasons for rejection include late or missed loan payments (you have to make all your loan payments on time) and non-qualifying employment (be sure to update the program every year to make sure you still qualify).  Your spouse may be locked into a job or career they end up hating.  And at the end of it all, the remaining balance of the forgiven loan will be treated as taxable income in the year it is forgiven.   Meanwhile you will be accumulating extra interest on the balance you aren't paying off by reason of IBR. 

You really need to think about the tax money you will be losing over the next 10 years, and the real likelihood of making every single qualification for the next ten years, before you decide to do this.  PSLF is not the magic bullet it seems to be and it is even less useful in a community property state. 

[gordonowski]

@Opus 17 , Thank you so much for taking the time to reply to my post.

I completely agree that in the long run, filing jointly would be ideal for us.  I think your response would be very applicable if we were at the beginning of the 10 year period. The thing is that she is ALREADY 8 years IN (something like 100 out of 120 payments). This year and next year would theoretically be the only years we have to file separately like this for her to qualify for the loan.  These numbers aren't exact, but it's something like $100k of loan forgiveness and less than $10k savings per year for 2 years to do it this way... you know, if it all works out. Your statistic on loan forgiveness is a great source of anxiety for me (I have seen similar numbers in many recent news articles), but, as far as I can tell, she should totally qualify. 

[Opus 17]

Only you can decide if it works for you.  You're going to owe about $35,000 in state and federal income tax when that $100K balance is forgiven, through.  Better start saving. 

[gordonowski]

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@Opus 17 wrote:

Only you can decide if it works for you.  You're going to owe about $35,000 in state and federal income tax when that $100K balance is forgiven, through.  Better start saving. 

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FYI - for others that might find this thread later, while this is true for certain loan forgiveness programs, this doesn't appear to be the case for PSLF: (source: https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service/questions) 

Are loan amounts forgiven under PSLF considered taxable by the IRS?

No. According to the Internal Revenue Service (IRS), student loan amounts forgiven under PSLF aren’t considered income for tax purposes.

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@Opus 17 wrote:

I can definitely tell you that half your income is your spouse's and half your spouse's income is yours

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I realize that from a legal ownership standpoint, my wife is entitled to half of my income. I'm still unclear as to whether this requires her to claim 50% of my income on her tax return (outside of the 8958 form) if we live in a community property state? 

It sounds like in non-community property states, what we're trying to accomplish is fairly straightforward (https://www.studentloanplanner.com/married-filing-separate-paye-and-ibr/). I'm not quite sure how the screens I'm referencing in my original post get pulled through to the actual tax forms, which could help me as I look into this. 

[Opus 17 · Accepted solution]

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@gordonowski wrote:

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@Opus 17 wrote:

Only you can decide if it works for you.  You're going to owe about $35,000 in state and federal income tax when that $100K balance is forgiven, through.  Better start saving. 

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FYI - for others that might find this thread later, while this is true for certain loan forgiveness programs, this doesn't appear to be the case for PSLF: (source: https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service/questions) 

Are loan amounts forgiven under PSLF considered taxable by the IRS?

No. According to the Internal Revenue Service (IRS), student loan amounts forgiven under PSLF aren’t considered income for tax purposes.

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I'm actually pretty concerned about this.  The actual text of the tax code says that loans can be forgiven tax free "if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers."  

This has always applied to loans where the conditions of loan were disclosed up front and part of the deal.  Such as, "we'll forgive your med school student loans if you work at least 5 years in an under-served area."  

The problem is that PSLF applies this principle retroactively.  You can take the loans out with no thought of working for a 501(c)(3), then look at your debt and say "holy crap I better do something about this" and apply for PSLF.  Forgiveness was never a "provision" of the loan when it was made, it was retroactively applied.  If my reading is correct, the IRS might be going along with it now, but a different commissioner of the IRS might change their mind, or someone could sue to stop the program.

Now, maybe the federal government was clever enough to mention PSLF in the original loan documents when your wife signed them 10 years ago.  That might may the loan "subject to a provision" of potential forgiveness.  

What I really wanted to find but was unable is a Revenue Ruling, that would make me happier about the tax forgiveness.  Hopefully you are right and it will work out.

https://www.law.cornell.edu/uscode/text/26/108#f_1

[Opus 17]

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@gordonowski wrote:

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I realize that from a legal ownership standpoint, my wife is entitled to half of my income. I'm still unclear as to whether this requires her to claim 50% of my income on her tax return (outside of the 8958 form) if we live in a community property state? 

It sounds like in non-community property states, what we're trying to accomplish is fairly straightforward (https://www.studentloanplanner.com/married-filing-separate-paye-and-ibr/). I'm not quite sure how the screens I'm referencing in my original post get pulled through to the actual tax forms, which could help me as I look into this. 

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In a community property state, you each must report half your community income when filing separately.  

Now, you might have non-community income.  Your wages before the date of your marriage might be non-community income, and if you or she has assets from before the marriage that generate income (like stocks or rental property) that might not be community income.  This varies per the laws of each state and you really should have an accountant help you. 

[RARJEM]

Did you ever get a real answer to the logistics of filling out the community income and tax withholding adjustments?  I'm in the same boat and haven't been able to find any reliable information here thus far.

[VictoriaD75]

When you are doing the Community Property allocation you will take the TOTAL for the community property for each category then divide it in half.  For the amount attributed to each spouse, you add or subtract to make up the difference of the half.  For example:

If Bob made $800 and Mary made $200 the total wages are $1000.  One half is income to each spouse- which is $500.

Because Bob made more, he would have a subtraction to get his $800 to $500.  Mary would have an addition of $300 to get her to $500.

***Community property states: 

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Click here to learn more about community property and Married Filing Separate Returns.

[RARJEM]

I understand the logic of it.  But it's a little messier when you got married part-way through the year and have multiple income sources and then you have to go through individual paychecks to determine which income was earned after the wedding date.  And even then the wedding date may fall part-way into a pay period--do you try to split up the paycheck by day?  And then you also have to adjust withholdings--do you do this exactly like you would the income?  And then how exactly do you complete the 8958?

[Doe57]

I too need help since I am on a income  based repayment program 

[kmeeeee]

This is driving me crazy on how to fill it out in Turbo Tax.  Like the mortgage, do we both claim it, but input half of it or does the sheet at the end make the adjustments?  I mean do I go along filling it all out like it is separate and the adjustment will fix it?  There are also only three, spaces on form 8958.  I assumed in amount allocated to each spouse you just split it in two, but from your example below??  Is the allocation below, like add 300 the spouse allocation.  Really understood the concepts, but am confused in Turbo tax.