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kristiswines3
Level 1

married, I moved, he did not, income in 2 states and a small business, how to file

I moved last August, we are still married and want to file jointly. I have a small business and work, he also works and one kid in college(he has paid nothing towards for support). I had residency in both Maine and Virginia (moved 8/1/2020).  Turbo tax is saying to file Federal as joint. Then do 2 mock fed returns. ? about how to separate the business and or the kiddo?  Looking to get the most bang for our buck.  And how do we file the state returns, 2 separate ones form Maine and one for Va?  Please help

3 Replies
Opus 17
Level 15

married, I moved, he did not, income in 2 states and a small business, how to file

First, did you change your permanent residence to VA?  What is your long-term intent?  Did you change your domicile?

 

I recently found that the PA tax web site has a very thorough discussion of domicile.

https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Brief-Overview-Filing...

 

It's possible to change primary residences for a long period of time without changing your domicile.  Determining your domicile is the first step to determine how to file.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
kristiswines3
Level 1

married, I moved, he did not, income in 2 states and a small business, how to file

My daughter and I left Maine and moved to Va long term.  I am still currently married, divorce not started yet. Trying to find a fair way to complete our taxes for the year 2020. Hope to have divorce final by end of year 2021. 

Opus 17
Level 15

married, I moved, he did not, income in 2 states and a small business, how to file


@kristiswines3 wrote:

My daughter and I left Maine and moved to Va long term.  I am still currently married, divorce not started yet. Trying to find a fair way to complete our taxes for the year 2020. Hope to have divorce final by end of year 2021. 


So, as I think you already read, the issue is that your spouse is a full year Maine resident, but you are a part-year Maine and part-year VA resident.  If you file jointly at the federal level and make no state adjustments, you will file joint federal and joint state.  That means that you will pay full year Maine income tax on all your income, plus VA income tax for the 4 months when you were a VA resident, essentially paying double tax on part of your income.  Your spouse would also pay VA tax on 4 months of his income, if he files a joint part-year VA return with you.

 

So, what you need to do is to file a federal joint return for 2020 (assuming that, despite your separation, that is agreeable to you) and separate returns for Maine (your spouse) and Maine plus Virginia (for you).

 

(Alternatively, you each file as married filing separately federal and state.  Separated spouses often do this, although you will probably pay more federal income tax.  If you agree to file jointly, you must have an agreement in place about how you will divide your tax refund or split the tax owed.  There is a form you can use to send the tax refund to two different bank accounts.  But if there is likely to be a dispute, it might be safer to file separately.  Filing a joint return greatly limits your ability to dispute anything, since signing a joint return means you both agree to take full responsibility for all the items on the tax return including the spouse's items.)

 

If you agree to file jointly, then prepare your joint federal return listing all your income and deductions including your schedule C business.   Don't prepare any state returns with this federal return.  You can e-file this federal return.  Since it is a joint return, you claim your child as a dependent in the usual way.

 

Then you need to prepare 3 separate state returns; your husband for Maine as married filing separately, you for Maine as MFS and you for Virginia as MFS.  Because of the way Turbotax is structured, the only way to do this is to first prepare a federal MFS return, since information flows from federal to state.  Once your spouse generates the federal MFS return, he will generate a Maine MFS return.  Discard the federal MFS return, and file the Maine state return by mail (it can't be e-filed in this situation).  You will generate a federal MFS return, and then you will generate a part-year resident Maine return and a part-year resident Virginia return.  Turbotax will ask what states did you live in, and whether you moved or were working out of state temporarily, so you want to make sure that you report that you moved to Virginia rather than were a Maine resident working out of state for part of the year.  Turbotax will also ask you to manually allocate your income (W-2s and schedule C) based on which state you were living when it was paid.  In the end you will also discard the federal MFS return and file both state returns by mail, since you won't be able to e-file in this situation.

 

On the joint federal return, you both claim the child as a dependent since it is a single tax return.  On the separate state returns, either parent can claim the child as a dependent, since you lived together for more than half the year and a child at college is considered to have lived with both parents.  If you can't agree on who will claim the child, the tiebreaker goes to which parent the child lived with the greater number of days.  For 2020 and this type of dependent, it doesn't matter if the parent paid support, the key test is which parent or parents the child lived with at least half the year.

 

Because of the double taxation, it is likely that this is the best answer.  Even though MFS often has higher tax rates, that should be offset by avoiding double taxation of your wages after October in both Maine and Virginia.  However, the only way to be guaranteed is to test the MFJ/MFS combination against going full MFS on both federal and state income taxes.

 

You say it is "your business."  If you are the only person contributing to the business, you report it on a schedule C in your own name.  This will be the same regardless of whether you are preparing the joint federal return or the separate federal/state returns.  If you both materially participate in the business, then each spouse needs a schedule C in their own name that reports their share of the income and expenses based on their share of participation.  

 

The special rules for children of divorced or separated parents only apply when the child is less than legal age (18 in most states).  That is not an issue in 2020 since you separated after half the year had passed.  However, for 2021, neither parent will be able to claim the child as a "qualifying child" dependent, for which the key test is where the child lived.  To claim the child as a dependent for 2021, the only test that can be considered is the test for "qualifying relative" which requires (a) the child had less than $4300 of taxable income, (b) the parent paid more than half their living expenses (including tuition, room and board, medical, etc.).  Because of the income rule, if your child has a job, it is likely that no one will be able to claim them as a dependent for 2021 (and this may be advantageous to them getting financial aid).  

 

If you aren't divorced by 12/31/21, you would still have the option of filing married filing jointly, if you can agree.  Otherwise, you will probably file married filing separately.   Head of household won't be available to you unless you can claim your college-age daughter as a dependent (because she earned less than $4300 and you paid more than half her support.)

 

You say you want to be "fair."  There is nothing fair about divorce, it's a legal process that can be quite difficult.  Filing jointly for 2020 may reduce your federal tax, but you have to be in agreement about how to divide the tax owed or the refund, you have to trust each other to stick to that agreement, and you have to be willing to be held both jointly and separately liable for the entire tax return, even the parts that belong to your spouse.  (In an extreme case, if spouse A signs a joint return and it is later found out that spouse B was cheating on their taxes and committed fraud, the IRS can sue both spouses, or spouse A only if spouse A has more money, and the "innocent spouse" rule does not protect spouse A, because spouse A signed a joint return.). Be sure you are willing to accept that responsibility if you file jointly. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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