Problem with Form 8958 and Community Property Income Adjustments
I live in CA and am using Married Filing Separately status, taking the standard deduction. (I know joint filing is a better tax scenario for most people, but I must use MFS for other reasons).
I have read IRS Pub 555, and the TurboTax article "Married Filing Separately in Community Property States." I have also researched the internet exhaustively, spoken to the IRS on the phone, and asked advice from a friend who is an accountant.
Background: I have no wages and no W-2, and my husband has one W-2 with wages of $50,000 (rounded for the purposes of this explanation). I have $100 of interest income on 1099-INT forms, and he has no interest income. The federal government requires that when using MFS filing status in CA, spouses divide and report their income under community property rules; however, there are no lines on the federal tax return to indicate this division. The advice I have received is for each spouse to report his/her own income on line 7 (for wages) and 8a (for interest), and then make an adjustment on line 21 to divide income equally between spouses. In my case, I would report my interest income of $100 on line 8a, and on line 21 I should have a positive community property adjustment of $25,000 (half of my husband's income) and a negative community property adjustment of $50 (subtracting half of my own income). TurboTax did not explain this at all, and it has taken many hours of research to get to the point where I understand how our returns should look and which lines of the 1040 the community property adjustments should appear on.
The problem with TurboTax occurs in the Step-by-Step Community Property Worksheet. Here is a walkthrough:
Under Other Tax Situations, Click Done with Other
Select Yes, I need to report partner/spouse's community property income
This brings me to the worksheet: the following screens will generate form 8958 (Allocation of Tax Amounts Between Certain Individuals in Community Property States), which must be filed with the 1040. The screens require you to list all sources of community property income, i.e. each spouse's wages and interest income
Community Property - Wages
TurboTax displays an allocation screen and this notice: "If you make any changes to the taxpayer column, these changes will not be reflected in your return. You will need to return to the W-2 section of TurboTax to make the necessary changes." This sounds like TurboTax expects me to list my half of community wages in the W-2 section (i.e. on line 7 of the 1040), but that won't work because (a) I don't have a W-2 and (b) if I did have wages, the amount on line 7 should match my own W-2, not my share of our community property wages and (c) line 7 is not the correct place to make these changes. So I continue with the worksheet but do not make changes to the W-2 section of my return. Actually, TurboTax will not let me add wages in the W-2 section without a W-2, so I couldn't do what it asks even if I wanted to.
Community Property - Interest
Again, TurboTax tells me "If you make any changes to the taxpayer column, these changes will not be reflected in your return. You will need to return to the interest section of TurboTax to make the necessary changes." So now TurboTax is recommending that I list on 1040 line 8a my share of the community property interest, which is half of the amount shown on my 1099-INT forms. I doubt the program will actually let me do that, since it takes its information directly from the 1099-INTs that I have entered.
Community Property - Other Miscellaneous Items -- I did not have any of these, and left this screen blank, but as you will see, TurboTax INCORRECTLY automatically adds an amount here later on the process, after the community property adjustment screen has been completed. I will get back to this later.
Enter your Spouse's Community Income (taxable refunds, capital gains, etc) - I did not have any of these
Community Property Income Adjustments (Enter your community property income adjustments below)
--Community Property Addition Adjustment (this is where you add half of your spouse's total income to your return)
--Community Property Subtraction Adjustment (this is where you subtract half of your own total income from your return and allocate it to your spouse)
This section will result a positive or negative figure being entered on line 21, with the words "see line 21 statement," and generates a form entitled Form 1040 - Line 21 - Other Income Statement. On the Other Income Statement, Line 18a will show "positive community property adjustment" and Line 18b will show "negative community property adjustment." AFTER ENTERING THESE ADJUSTMENTS, TURBOTAX PLACES AN ENTRY ON LINE 12 OF FORM 8958 (Allocation of Tax Amounts Between Certain Individuals in Community Property States) LABELED "OTHER INCOME." In other words, it reports again on Form 8958, Line 12 the same income that was already reported on Lines 1 and 2. Line 12 is supposed to be for other sources of income such as Social Security, Unemployment, etc. TurboTax does not seem to know that the "other income" (from line 21) is a community property adjustment and should not be listed on Form 8958 as additional income that needs to be allocated.
Now, if I return to the community property worksheets, under "Community Property - Other Miscellaneous Items," I see a new entry pre-filled with the description "Other Income." This is the same figure that appears on Form 8958, Line 12. TurboTax will not let me delete this; the only way to get rid of it is to delete the Community Property Addition Adjustment that I previously entered. Obviously that should not be removed, since it is how the IRS knows (on 1040, line 21) the amount of community property income I am claiming.
So the problem is: TurboTax thinks that my "Positive Community Property Adjustment" on 1040, Line 21 is some kind of "Other Income," and it is asking me to allocate this "Other Income" and listing it is a source of income on my Form 8958. And the program will not let me delete it.
So my 1040 cannot be filed unless I either white out the "Other Income" entry on Form 8958 when I submit my paper return, or download a Form 8958 from the IRS and submit that instead of the one the TurboTax filled out for me.
I have to say that the whole Community Property Worksheet is a waste of time, especially as it says ""If you make any changes to the taxpayer column, these changes will not be reflected in your return. You will need to return to the W-2 section of TurboTax to make the necessary changes." That is directing people list their community property allocations on the wrong part of the 1040. The IRS has an automated matching system, and if the amount on line 7 does not match your own W-2s, you will get a letter from the IRS asking for an explanation.
How has anyone else dealt with the Community Property Worksheet? Did you successfully make community property adjustments to your 1040, Line 7 (the W-2 section)? Or did you ignore that advice and use Line 21? If you used Line 21, how did you handle the "Other Income" entry generated by TurboTax on your Form 8958 Line 12?
Form 8958 was just added to TurboTax yesterday (it was previously unavailable). So I expect a lot of people will run into this situation over the coming weeks.