How to enter W-2 forms for married filing separately in a community property state?

[Adam_Taxes]

My wife and I are Married Filing Separately in California, which is a community property state.  How should I enter the W-2 forms on both of our taxes?

It looks like I need to report all of our W-2 forms on each of our tax returns, and manually divide the values in half.  Is that correct?  It also looks like TurboTax forces me to report my wife's W-2s as mine on my return, and my W-2 as my wife's on my wife's return?  (Attempting to manually check the form as belonging to my spouse causes TurboTax to report this as an error, which sort of makes sense, but I just wonder if this is going to end up confusing the IRS if TurboTax reports the W-2 with the incorrect employee SSN.)  If I enter the actual full values from the W-2 (without dividing in half) it looks like TurboTax would double-report our income earned.

I know that I also need to fill out the community property worksheet for form 8958, but it looks like this doesn't affect the income numbers reported on form 1040 computed from the W-2 values, which is what makes me think I need to manually divide the W-2 numbers in half when entering them.

In the past we have filed with a CPA, who has reported half of the income and withholdings on each of our returns, along with form 8958 explaining the allocation, as well as a supplemental information form explaining the split.

Also, before anyone comments, I am fairly certain that MFS will result in a lower tax than MFJ in our situation.  California has some (uncommon) state taxes where the income limits are somewhat unfortunately not doubled when filing jointly, making it beneficial to file separately.

[ErnieS0]

Don’t include your wife’s W-2 on your income tax return or your W-2 on her return. What you will include is a community property adjustment to equalize the income and withholding on both returns.

This is done manually.

The IRS will not get confused. That’s what Form 8958 is for. This form shows IRS your total joint income and how you divided it among the two returns so they can match both returns to make sure nothing was missing.

Form 8958 does not affect the tax calculation on your Form 1040. It’s informational.

With a community property adjustment, you are basically breaking down your income twice — once on Form 1040 and once on Form 8958.

There is an excellent discussion on this at How do I figure what the community property income adjustment is? We are married filing separately, ....

Also see Married Filing Separately in community property states.

[Adam_Taxes]

For the community property income adjustment, how should this be calculated for different types of income?

e.g. say

- My W-2 wages are 100,000

- My wife's W-2 wages are 50,000

- We have 10,000 of long term capital gains income reported on a 1099 under my name

- We have 5,000 of dividend income reported under my name

- We made 10,000 in mortgage interest payments reported on a 1098 in my name

How should all of this be reported simply via the community property adjustments?  If I report a community property income adjustment, it looks like this applies to line 8z on Schedule 1, but it looks like dividend income on form 8960 is still calculated using the full account for my tax return, rather than half of the amount.  (Even after reporting that the dividend income should be split 50/50 on the community property worksheet.)

Other forms like 8959 also look like they are being computed on my return using just my W-2 numbers, rather than half of our combined numbers.

[RobertB4444]

All of that income should be evenly divided on the community property worksheet.  Make sure you have completed all of the entries in the tax return before you worry about whether the system is doing the math properly.  Sometimes making the sausage takes a minute.

@Adam_Taxes 

[Adam_Taxes]

I have entered in all of the forms, but TurboTax is definitely not computing the information correctly.

None of the information entered in the "Community Property - Wages", "Community Property - Interest", or "Community Property - Dividends" sections seem to make any difference whatsoever with how TurboTax calculates taxes.  I can change them to report that I want to split the income 50/50, or 100/0, or 0/100, and TurboTax does not change any of the computed tax numbers.  These fields simply seem to be used for informational reporting.

The only things that it seems to take into account is the data on the "Community Property Income Adjustments" and "Tax Withholding Adjustments" pages, and these do not provide any way to divide capital gains or dividend income.  The income adjustments simply gets used to fill line 8z on Schedule 1, which is not how the community property income division should be applied.  As I have mentioned, it is still reporting 100% of dividend income data on my return on line 3a/3b, as well as on Schedule B, and is using 100% of my income on form 8959.  On my wife's tax returns my income is incorrectly not reported in these areas.

On the community property income adjustment thread that @ErnieS0 linked above it sounds like the general consensus from multiple users there is that TurboTax cannot correctly handle the MFS community property split.

[DMarkM1]

You are correct.  The only items that actually change your return are the income adjustment and the withholding adjustment.  Those other division pages are just informational as you mention.  

Ideally, your income adjustment and your spouse's income adjustment should account for any changes that would occur when you make the income splits.  

I suggest making a note of your adjusted gross income line 11 on your form 1040 before any splits.  Then go back and actually input the income items as if you are splitting whether 50/50 or 25/75, whatever.  Note the change in adjusted gross income.  That will be what you put in the "Income Adjustment" box for form 8958.  

Go back and put in the original numbers from your forms and enter the Income adjustment box number.  Show the splits on the informational pages.   

Whatever number you put in your adjustment box, you put an opposite change on your spouses return.  Including the complementary splits on the information pages.