Hi all,
I live in a community property (CP) state, California and was recently married on September 16, 2019. I have large student loan debt (over $250k) and am on an income-based repayment plan, which calculates my monthly payment amount based on my adjusted gross income in the previous years tax return. As a result, filing jointly nearly doubles my monthly student loan payments, forcing me to file as married but separately. I have a few questions about being married but filing separately in California/CP state.
1) According to Publication 555 (Rev. March 2020), it reads that community property is that which is acquired "during the marriage." Literally, I interpret this to mean that I must prorate the wages and federal tax withholding on my W2 as measured from the date I was married (Sept 16 = day 259; 107 days remaining, which means 30% of the year, we were married). Therefore, I should multiply .30 by my wages and withholding (and repeat with my spouse's W2) to determine aggregate and determine the CP wages and withholding. Is my interpretation correct? Or should I simply assume the marriage for the entire year, combine the wages and withholding amounts and divide it all equally?
2) How should I enter this into Turbotax exactly? My W2 was automatically pulled by the program, so should I manually enter/edit the W2 entries to reflect 50% of the community wages and 50% of the community federal tax withholding, then similarly enter my wife's W2 and enter 50% of those numbers as well? If so, can I leave all the other boxes (box 3-20) from my wife's W2 as blank entries?
For example, let's say Spouse A (filer) made $140k and $24k was withheld. Spouse B made $100k and $15k withheld. Should Spouse A enter two different W2's: (1) their own W2 with but manually entering wage as $70k and withholding as $12k; (2) Spouse B's W2 but manually entering $50k and withholding as $7.5k? In the end, Spouse A and Spouse B would each report wages as $120k and federal withholding as $19,500?
3) I know that I will be prompted to make "Community Property Income Adjustments" to clarify the allocations in (2) above via IRS Form 8958 but I'm not exactly sure how to make this calculation as what counts as an "addition adjustment" vs. a "subtraction adjustment" in Turbotax. Given that I make more than my wife, should I add the amount that my wage plus the amount that my federal income tax withholding was reduced in the 50/50 CP allocation?
Using the same example as above where: Spouse A made $140k with $24k withheld and Spouse B made $100k with $15k withheld. Therefore, each reports wages as $120k and federal withholding as $19,500.
Then on this page, Spouse A would enter:
(A) "0" in "Community Property Addition Adjustment" and
(B) the reduced wage (-$20k) and reduced withholding (-$9k) = "-$29,000" in the "Community Property Subtraction Adjustment" field?
On the other hand, Spouse B would need to enter:
(A) "$29,000" in "Community Property Addition Adjustment" and
(B) "0" in "Community Property Subtraction Adjustment."
Is my interpretation here correct?
Very much appreciate all guidance offered. I've been reading up all over the internet, including this community, and have had little definitive answers so anything would be appreciated!
Thanks!
I cannot answer your question because I have not studied CA law on this. I can only comment that IRS Pub 555 is not the controlling factor because as Pub 555 states:
"Generally, the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes."
Whether CA allows pro-rating community property for the year of marriage or not probably can only be answered by a tax professional or tax attorney that practices in CA and deals with community property laws in CA. Each community property state has it's own laws dealing with this.