MFS in CA, TurboTax doesn't calculate taxes properly (repost)

[i66d]

Re-posting (apologies for duplicating) here since the original message landed under "Investors and Landlords" topic.

We are filing MFS, California residents. I'm using TT Premier, Desktop for Mac.

The problem: We both have 1099-INT and 1099-DIV forms. I imported the data from our brokerage into the respective separate TT returns. I also have W-2 and 1099-B income (cap gains). These were imported in my return only. I calculated an AGI amount we need to arrive at since CA is a community property state (add both AGIs, divide by 2 and determine the plus/minus amount to enter on the Community Property Income Adjustments page). This way I was able to get our AGIs to match. I would've expected that TT will total (separately) our dividend, interest, wages and capital gains, then split equally for the purposes of determining our due taxes. Surprisingly, that's NOT the case. TT kept everything separately (form 8958) and calculated **vastly different amounts of tax** on our MFS returns. If everything is split 50:50, I expect taxes to be the same too... Reverse-engineering a bit, it seems like TT is treating the adjustment income which we added to the return with lower original AGI as general income... and taxing it that way instead at the preferential rates for cap gains (for example).

How can I fix this?

Splitting the various amounts by sources of income in TT (community property income adjustment pages) doesn't help. There's a note in the app stating that such changes won't affect the tax calculations and are for informational purposes only.

As is, TT just doesn't seem to handle MFS correctly. Or, am I missing something obviouis?

[ReneV4 · Accepted solution]

To fix the vastly different amounts of tax that you are encountering, it will be necessary to manually make entries to ensure the calculations are correct.

Instead of importing the data into one return and using an adjustment to move half, and to ensure the capital gains and dividends are split, I recommend that you report exactly 50% of every community item on each individual return. 

To do this, take the following steps:

1. Go back to the Community Property section in both returns and remove the plus/minus adjustments you created so that your adjustment line on your 1040s are $0
2. Next, manually split the income sources
3. For every 1099-DIV, 1099-INT, and 1099-B, divide by 2
4. Enter 50% of the dividends/gains on your return and 50% on your spouse's return
5. Enter both W-2s on both returns, but only input 50% of the values for Box 1 (Wages), Box 2 (Federal Withholding), etc.
6. Note: Keep Social Security and Medicare boxes (3–6) matching the original W-2 for the person whose name is on the form
7. Use Form 8958 to reconcile, since your entries won't match what the IRS received from the banks/employers
8. In TurboTax Desktop, go to Forms Mode and open Form 8958
9. List the full amount in the "Total" column and show the 50/50 split between Spouse A and Spouse B to tell the IRS, "The 1099-DIV says $1,000, but because of CA law, I am only reporting $500."

By following the above steps, you will have the accurate split for your two returns.

[i66d]

Thank you for the detailed answer, ReneV4, much appreciated!

I'm happy to follow the method you outlined and I can see how this will result in correct tax calculations on both of our returns. I considered this, but I wasn't sure if IRS will accept the reports given that the various 1099 (INT, DIV, B) and W2 forms won't match the originals. For my piece of mind, is there a particular IRS publication I can refer to documenting this method? Or, is your recommendation based on positive past experience filing MFS in this way?

A couple of follow up questions:

- we both paid estimated taxes, while close in amounts, these don't alway match; should we total and split 50:50 the est. tax payments as well?

- I have a rental unit income (got a 1099-MISC from the prop mgmt company). Following your recommendation, we'll split the income, but that implies also splitting the related expenses. To keep things simple(r), can I file the expenses "as is" on only one of the reports (mine, since I'm the single owner of that rental property) despite that this will result in slightly different (lower) tax due on my report?

Many thanks for your help!

[DianeW777]

The IRS will have the totals of your documents which they can reconcile. Keep the documents with your tax file should you need them later. You will know exactly how you arrived at the totals you enter on the tax return.

If you and your spouse paid estimated tax jointly but file separate income tax returns, either of you can claim all of the estimated tax paid, or you may divide it between you in any way that you agree upon. 

• If you can't agree on how to divide it, the estimated tax you can claim equals the total estimated tax paid times the tax shown on your separate return, divided by the total of the tax shown on your return and your spouse's return.
• If you paid your estimated taxes separately, you get credit for only the estimated taxes you paid.
  • IRS Publication 555

Since rents must be reported equally between you, then the expenses should be split as well. However, see the note below if only one of you owns the property.

Income from separate property.

In some states, income from separate property is separate income. These states include Arizona, California, Nevada, New Mexico, and Washington. Other states characterize income from separate property as community income. These states include Idaho, Louisiana, Texas, and Wisconsin. (References the same publication from above.)

@i66d