Living in CA and MN married spouses

[Peter-X]

My wife is living in CA, a community property state. 

I am living in MN, a non community property state. I stayed with her 3-4 months in 2022 and worked remotely for my MN based work in CA. So I am keeping MN residency. 

After did research, it seems that we need to MFS for both state and fed and standard deduction because CA requires that you use the same filing status on CA return that you use on federal return. 

There are two questions: 

Assume my wife's income is $80k and mine is $60k. We need to do community property adjustment. Both of us will report $70k after filling form 8958 for fed taxes. (1) Is our understanding correct? 

If the first one is correct, the second question is how to do community property adjustment for me?  We are using Turbotax desktop. I search for community property and jump to community property link. It jumps to "we're ready to review your federal return" page. Not place to fill form 8958. There are no issue for my wife's filing. 

The rest of our case is quite simple, one W2 form for each person, some div and interests and some stock loss. Current filing almost stresses us out. Is MFJ for both fed and state, seems to be much easier way for community property, a technical doable way to do that? Thanks very much.  

[DMarkM1 · Accepted solution]

Yes. The easiest way to complete these returns is to use a TurboTax Desktop version which allows up to five different returns to be created.    

Question 1:  Yes, your understanding is correct.  For the income adjustment for community property in your scenario you would have a plus $10K adjustment and your spouse would have a minus $10K adjustment.  Then on your separate CA returns you would be nonresident CA and allocate only the income earned while in CA to CA.  CA will use your total income from your federal return, as adjusted for community property, as part of a ratio to determine your CA tax on CA source income.  The other part of the ratio is the CA allocated amount that you enter.  TurboTax will make those calculations for you based on your entries.  

As you mention your wife's resident return would be pretty straightforward.  Your wife would be CA resident and include all of her income her CA separate return.

Yes, you are correct MN does not have a mechanism for a community property adjustment.  For your MN return.  You will need to create a "Mock" federal married filing separate return that only has your income in it with no community property adjustment.  You will not file that "Mock" federal return but use it to complete your Married Filing Separate MN resident return.  You will need to print/mail that MN resident return.  

You wife will not have a MN filing requirement since she had no MN source income.  

[Peter-X]

Thanks, DmarkM1 for your detailed explanation. It is super useful.

To your second point, other than MN return, I think have issue for fed return. Because TurboTax doesn't provide a place for filling 8958 for me, my income is still 60K while my wife reduces 10k. I can hardcode it to 70K in form to form mode, but the number will be different from my W2. 

I played Turbo Tax a little more after I posted the question last night. I figure out a possible way to MFJ both Fed and two state return. When I do state return, I can first work on CA one. I take me as non-resident and the income I earned in CA time as CA source income. Then I work on  MN return. Turbo tax provides Tax paid to CA so that to get the credit. But the problem comes. The numbers are not correct. Adjusted gross income provided is my wife's income in CA and my income CA part excluded. The credit is our total CA tax.  It seems that we need to remove my wife's W2. and calculate the CA tax of my part to adjust. And when I continue work with it. It seems it assumes my wife is MN resident as well. My understanding is that M1NR with M1 for my wife as non resident is needed. Questions 1), how to remove my wife's W2 in MN tax return?  2) How to include a M1NR ? 3) In M1NR, there is no full year resident option for me. What should I do? Maybe, Turbo Tax will help me solve that. If yes, it will be great you can confirm it. 

Thanks a lot again !  

[DMarkM1]

No.  You need to stick with the original plan.  File separate returns federal, CA and MN.  The FED and CA will be with community property adjustments on yours and spouse's separate returns.  In the Desktop version for your separate returns for FED use the "Search" and enter "Community Property"  then select the "jump to" link. 

You will be asked to enter the income adjustment "Addition" for you and "Subtraction" for your spouse.  The adjustments will go to line 8z on schedule 1 which flows to line 8 on the 1040.  The only other change that will affect calculations is the "Withholding" adjustment, if you choose.  Any withholding adjustments go to line 25c on the form 1040 and will not allow your returns to be e-filed.  These adjustments flow to your CA returns automatically.  

The rest of the entries there are just support allocations that do not affect calculations.  The net change due to the allocations, if any, should be what you enter as the adjustment amount.  Line 1a for your W2 income should remain the same as entered from your form W2 as would all the other lines and entries.  Only the plus/minus in line 8z and/or the withholding line 25c should change. 

For MN as I mentioned before, you will create a "Mock" separate federal return that only has your income without the community property adjustments.  This will allow your separate MN return without your spouse's income. She will not have a MN filing requirement.

As you discovered if you attempt joint returns both incomes will be on all returns.