Community Property State (Texas) - How to Put Separate Property Information on Form 8958 - MFS

[bratrudy]

Situation:  Retired, older couple in Texas wanting to submit taxes as Married Filing Separate (MFS).  As it was a second marriage for each partner, a prenup was completed and signed before the couple married -- specifying that there would be "no community property created during their marriage."  The prenup was written according to Texas Family Law and specifies, in the 48 pages of the document, that each partner would keep their own property, income, etc., all "real and personal property," and each party in the marriage agreed to keeping everything separate with no claims on the other person's properties or financial resources.  Each person has their own, separate properties, retirement, checking / saving accounts, credit cards, etc.  Nothing has been combined.   

The questions needing answers then are 1) how they need to prove / inform the IRS that there is no community property and 2) how to enter information into the required 8958 form to show only separate property / income information.

The couple is aware that they will lose deductions and will likely have to pay additional income tax, but do not want to file MFJ due to differences in handling of financial matters.

[GeorgeM777]

The IRS knows that Texas recognizes pre or post marital property characterization agreements.  Texas refers to such agreements as premarital and marital or post nuptial agreements.   In order for the IRS to recognize such agreements they must be in writing and it appears you have complied with this requirement.   Thus, you need to keep your premarital agreement and may have to produce it, or part of it, to the IRS if requested by the IRS.  

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.

To find Form 8958 in TurboTax, use the search tool, upper right side of the page, and enter "8958" in the search bar (no need to use the quotation marks).  You should see a jump-to link that will take you to the area where you can begin to enter your respective income amounts.  Before you do this though, make sure you have entered your personal information including your filing status, MFS.  

Additionally, here is a link to a TurboTax article that discusses Form 8958, and allocating income between spouses.

What is Form 8958

bratrudy

[bratrudy]

Already have the Form 8958, the instructions for 8958, and the IRS Community Property Pub 555 and have gone through all of it.  All of the information on TurboTax and in IRS refer to community property and separate property  (in the typical sense), but IRS does indicate that there are situratioin where community property laws are disregarded, and spousal agreements is one that "affects the status of property or income as community or separate property. Check your state law to deteremine how it affects you."

Have gone through Texas Family Code pertaining to separate vs. community property. It specifies (chp 3 Sec. 3.410 -- which specifies that the premarital agreement is:  "effective to waive, release, assign, or partition a claim for economic contribution, reimbursement, or both" for couple's assets.

Texas Family code also specifies in Chp 4: 

Sec. 4.103.  AGREEMENT BETWEEN SPOUSES CONCERNING INCOME OR PROPERTY FROM SEPARATE PROPERTY.  At any time, the spouses may agree that the income or property arising from the separate property that is then owned by one of them, or that may thereafter be acquired, shall be the separate property of the owner.

According to Texas Law, the premarital agreement signed by both parties (in this case) prior to marriage states in writing that each party in the marriage retains separate ownership of all income, debts, and assets of the original party and neither party has any claim, rights, or responsibilites to/for any income, debts, or assets from before the marriage or after the marriage.  

The form 8958 is where the "sticking point" is -- how to complete the form to meet IRS requirements -- since EVERYTHING is separate for income, property, deductions, credits, etc.  There is NO community basis for any classification  -- per the written premarital agreement -- and have always been reported as belonging to the only one spouse in previous joint federal tax returns. 

Example 1 - Interest income for the IRS form 8958:

Wife has two accounts that pay interest income.  Husband has none.   The two bank accounts from the wife ARE separate property.  She owned them prior to the marriage and were listed in the premarital agreement as separate property.

Bank A   Total  $1500        Split information:  Wife - $1500     Husband $0

Bank B   Total  $2000        Split information:  Wife - $2000    Husband  $0

Example 2 - Rental Income from Rent Houses

Wife has 2 rent houses -- purchased before marriage to current spouse - listed as separate property on prenup and are only in wife's name.

Husband has 2 rent houses -- purchased after marriage to current spouse.  Both properties are in husband's name only, were paid for from his wages before retirement -- but mostly from withdrawals from his IRA.  Both husband and wife agree that both of husband's rent houses are his separate property --which follows the requirements of the premartial agreement and Texas Family Law for separate property.

Wife's Rent house income:  $25000        Husband's Rent house income:  $17000

Form 8958 Entries:

Wife Rentals          Total $25,000      Split:   Wife - $25000            Husband  $0

Husband Rentals  Total $17,000      Split:   Wife  -  $0                   Husband $17000

Are these correct example entries of how the IRS form 8958 is to be completed with everything being separate income and property under Texas Family Law?

[RobertB4444 · Accepted solution]

@bratrudy  That is exactly how you will complete it - making sure that the amounts on each return reflect the actual earnings of the person.  You are essentially doing the tax return as though you were not in a community property state.  As @GeorgeM777 says above you should be prepared to present the prenuptial agreement to the IRS if it is requested but otherwise you're all set.

[bratrudy]

Thank you, @RobertB4444   That really helps.  It will be a pain to complete the form, but at least I have  better grasp on how to get it done.   Now the only problem will be actually getting the necessary info from the husband to get his info inserted into the form.   He's secretive as well as unorganized, so it may be a real nightmare trying to get his data to complete the form.