MFS in community property states

[Dan149]

Hello,  I live in Texas and understand the basics of community property laws in the state.  My question is in Turbotax how do I enter the W2s and self employment information?  Do I enter half of each form for each of us like some other tax programs or do I just enter my income.  My wife is self employed (as a gig worker) and so I understand that the income would be split between us but that the self employment taxes would only fall on her and the deduction would be split between us on form 8958.  I saw the income adjustment section in Turbotax but it does not appear that you can reduce your tax withholding (I tried to enter a withholding adjustment and it said the maximum value was 0) even though it is supposed to be split between both people evenly since that is how we are dividing the income.   Also, is the desktop version better for MFS?

[MonikaK1]

It depends. If you are filing a joint Federal return, you don't have to split the wages or other income items just because you live in a community property state. When you file jointly, you report all income from all assets. 

When you file separately, you must follow your state's definition of separate and community property. As you already noted, you would split your wages equally. Similarly, split withholding, deductions, and credits, as each spouse is only responsible for their 50% share (withholding is shown on Line 11 of Form 8958). Also, if you file Married Filing Separately, you must either both itemize or both take the standard deduction.

The IRS suggests married couples in community property states look at their tax situation under both joint and separate filing options to determine which version saves them the most. Filing a joint return may be less complex and qualify you for tax credits. Filing separately depends on your situation and how your itemized deductions stack up against the Standard Deduction.

When you live in a community property state and file separate returns, you each must report 50 percent of your spouse's income and half of income generated by community assets, plus all of your separate income. The IRS has an allocation worksheet to simplify your calculations in Publication 555 Community Property. You also have to decide who will claim dependent children.

You can use TurboTax Online to test different scenarios before deciding to file jointly or separately. Click here for more information. Once you decide, you can use either Online or Desktop to prepare the return(s).

Click here for tax tips for community property states.

See this tax tips article for more information about entering information on Form 8958.
 

[Dan149]

Thank you for the information. Do you know if the Community property income adjustments are just for W-2 and gig employment income or does it also include dividends and interest and such?

[DaveF1006]

Yes, Community‑property income rules apply far beyond W‑2 wages and gig‑work earnings. When you file Married Filing Separately (MFS) in a community‑property state, the law generally requires you to split all community income, which includes investment income such as dividends, interest, and capital gains, unless a specific exception applies. 

This comes directly from IRS guidance on community property and Form 8958, which is used to allocate all community income and deductions between spouses when filing separately. The IRS explains that Form 8958 is used to divide “community income and deductions” according to state law, not just earned income.

How to Allocate Income on Form 8958 for Community Property