1. Married Filing Separately and Community Property Training
January 15, 2015

2. Introduction
Married taxpayers come to VITA/TCE sites wanting to file separately
Want to keep financial affairs “separate”
Avoid refund offset when one spouse owes money
Child support
Student loans
Federal or state taxes
Other federally collectible debt
VITA/TCE site should not file a separate return “just because” the taxpayer requests it
Other reasons?
Spouse is non resident alien

3. Introduction
Taxpayers who have been separated for a long time and haven’t divorced for a variety of reasons
Religious reasons
Cost involved
Don’t want “stigma”
Children
Other reasons?
Spouse has disappeared
Domestic violence

4. Objectives At the end of this lesson, you will be able to:
List the conditions that must be met for a VITA/TCE site to prepare a return with the filing status of Married Filing Separately (MFS).
Identify the forms and worksheets in TaxWise that must be completed when preparing a MFS return.

5. Filing Status 5 Filing Statuses: Single Married Filing Jointly (MFJ)
Married Filing Separately (MFS)
Head of Household (HOH)
Qualifying Widow(er) with Dependent Child
Go over for review purposes only. Will not teach these filing statuses in this lesson.
Review which filing status most beneficial (MFJ) to least beneficial (MFS)
See Pub. 17, Chapter 2 for more details

6. Definition of Single Considered unmarried Unmarried
Divorced under a final decree by 12/31 OR
Legally separated under a divorce or separate maintenance decree by 12/31
NOT under interlocutory (not final) decree of divorce
Governed by state law
Some people are under the mistaken impression that a taxpayer can file as single if separated for a specific period of time, even if not legally separated or divorced.
Pub. 17, page 20 for more details

7. Definition of Married Considered married Married and living together
Living together in common law marriage
Married and living apart, but not legally separated under decree of divorce or separate maintenance OR
Separated under interlocutory (not final) decree of divorce
If not legally separated, then married
MFJ
HOH (if qualify)
MFS
Pub. 17, page 20 for more details

8. General Rule
Generally VITA/TCE sites in California do not prepare MFS returns
Why? – Because of Community Property rules
Adds to complexity of tax return – volunteers not trained
Community income has to be split – information on Form W-2 will not match information on return
Other spouse may disregard community property rules

9. What is Community Property?
Community property is property:
That you, your spouse…, or both acquire during your marriage…while you and your spouse… are domiciled in a community property state. (Includes the part of property bought with community property funds if part was bought with community funds and part with separate funds.)
That you and your spouse… agreed to convert from separate to community property.
That cannot be identified as separate property.
Note: Also applies to Registered Domestic Partners (RDPs)
From IRS Pub. 555, p. 3
See also, FTB Pub 1031, pp 9-10
Since RDPs are not legally married, the rules outlined in this lesson do not apply and RDP returns continue to be out of scope.

10. What is Community Income?
Community income is income from:
Community property.
Salaries, wages, or pay for services of you, your spouse…, or both during your marriage…while domiciled in a community property state.
Real estate that is treated as community property under the laws of the state where the property is located.
Note: Also applies to Registered Domestic Partners (RDPs)
From IRS Pub. 555, p. 3
See also FTB Pub 1031, pp 9-10
Since RDPs are not legally married, the rules outlined in this lesson do not apply and RDP returns continue to be out of scope.

11. Community vs. Non-Community?
Examples of community income:
Wages
Self-employment income
Pensions *
Examples of non-community income:
Inheritances
* Note that pensions can be community or non-community (or both), depending on where the pension was earned.
Note that pensions can be community or non-community (or both), depending on where it was earned.
Explain that it is not always easy to determine if income is community or not.

12. Community vs. Non-Community?
Whether income is community property or not depends on:
Type of income
Domicile of individual earning it
From FTB Pub. 1031, p. 9

13. What is Domicile?
Domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where, whenever you are absent, you intend to return.
FTB Pub. 1031, p. 9
See also IRS Pub 555, p. 3

14. Change of Domicile
You can have only one domicile at a time. Once you acquire a domicile, you retain that domicile until you acquire another.
A change of domicile requires all of the following:
Abandonment of your prior domicile.
Physically moving to and residing in the new locality.
Intent to remain in the new locality permanently or indefinitely as demonstrated by your actions.
Domicile can be different from residence
FTB presumes you are a resident if you spend more than nine months in California during the tax year.
From FTB Pub. 1031, p. 9 (domicile) and p. 4 (residence).
See also Pub 555, p. 3
The purpose of giving these definitions is not to provide comprehensive training in either domicile or residence; rather, it is to stress the fact that they are complex topics that are beyond the scope of VITA/TCE.

15. Exercise # 1
Q: What requirements must be met for a taxpayer to be considered “unmarried”?

16. Exercise # 1
Q: What requirements must be met for a taxpayer to be considered “unmarried”?
A: To be considered unmarried, a taxpayer must be:
Unmarried
Divorced under a final decree by 12/31 OR
Legally separated under a divorce or separate maintenance decree by 12/31
NOT under interlocutory (not final) decree of divorce
Governed by state law

17. Exercise # 2
Q: What 2 factors determine whether income is community property or not?

18. Exercise # 2
Q: What 2 factors determine whether income is community property or not?
A: Whether income is community property or not depends on:
Type of income
Domicile of individual earning it

19. Exercise # 3
Q: Is domicile the same as residence?

20. Exercise # 3 Q: Is domicile the same as residence?
A: No, in California domicile and residence are different. The FTB presumes you are a resident if you spend more than nine months in California during the tax year. The taxpayer’s “intent” is a relevant factor in determining domicile.
In some states domicile and residence are the same, but in California they can be different.

21. Keep It Simple
No intent to teach all community property and domicile rules in this class
VITA/TCE volunteers generally should not be making determinations of community property and/or domicile
Taxpayers should be presumed to be residents of and domiciled in California
If in doubt, refer to professional preparer
Establish some easy-to-follow guidelines as to when community property/income rules do not apply
If community property is not an issue, preparing a return using MFS filing status is not complex

22. VITA/TCE and MFS
When can VITA/TCE sites do returns with MFS?
Certain conditions must be met – must be sure community property rules do not apply
Must be crystal clear with no exceptions or gray areas
All of the following 4 conditions must be met:
Taxpayer lived apart from spouse the entire tax year and has NO intention of reconciliation
No commingling of funds
Name and SSN (or ITIN) of spouse available
Site coordinator must approve the MFS filing status

23. 4 Conditions for MFS
Taxpayer lived apart from spouse the entire tax year and has NO intention of reconciliation
Spouses do not live in same house, even on separate floors/rooms
No conjugal visits
No commingling of funds
No joint bank accounts
No property owned jointly or acquired with community income
Re: commingling – can disregard transfers satisfying child support obligations or transfers of very small amounts or value. Pub. 555, p. 8

24. 4 Conditions for MFS Name and SSN (or ITIN) of spouse available
Must be included on tax return
On MFS returns, if one spouse itemizes, both spouses must itemize – standard deduction not allowed
Taxpayer should be asked if spouse itemizes
Taxpayers who take standard deduction should be advised that IRS could disallow it
Site coordinator must approve MFS filing status
Site coordinator, preparer, and quality reviewer must be trained at advanced level and in this community property/MFS training
MFS should be exception rather than rule
If all these conditions are met, we can be certain that community property rules do not apply

25. Exception for NRA Spouse
California resident whose spouse is a non-resident alien (with or without Taxpayer Identification Number [TIN])
Spouse lives in foreign country
Taxpayer lives in US all year and does not qualify for HOH
Taxpayer does not want to file MFJ
Put “NRA” in SSN field if no TIN
Cannot claim personal exemption for spouse if no TIN
Return must be paper filed if no TIN
Site coordinator approval required
Now look at a situation where community property rules can be disregarded per Pub 555, p. 8
To determine residency vs. non-residency, see page L-1 (flowchart) of Pub (TY2013 revision)
No personal exemption for spouse without TIN – IRC Section 151(e)
No TIN, return cannot be e-filed; otherwise returns can be e-filed

26. Exercise # 4
Q: A taxpayer at your VITA/TCE site says she lives and is married in Ohio, wants to file MFS, and is working in California only temporarily. What should you do?

27. Exercise # 4
Q: A taxpayer at your VITA/TCE site says she lives and is married in Ohio, wants to file MFS, and is working in California only temporarily. What should you do? A: The taxpayer should be referred to a professional preparer to determine residency and domicile.

28. Exercise # 5
Q: What are the 4 conditions that must be met for a VITA/TCE site to prepare a MFS return?

29. Exercise # 5
Q: What are the 4 conditions that must be met for a VITA/TCE site to prepare a MFS return? A:
Taxpayer lived apart from spouse the entire tax year and has NO intention of reconciliation
No commingling of funds
Name and SSN (or ITIN) of spouse available
Site coordinator must approve the MFS filing status
Must be crystal clear with no exceptions or gray areas
Stress that in this situation community property rules do not apply

30. Exercise # 6
Q: What is the exception for a taxpayer with a non-resident alien spouse?

31. Exercise # 6
Q: What is the exception for a taxpayer with a non-resident alien spouse?
A: California resident whose spouse is a non-resident alien (with or without TIN)
Spouse lives in foreign country
Taxpayer lives in US all year and does not qualify for HOH
Taxpayer does not want to file MFJ
If no TIN, cannot claim personal exemption for spouse and return must be paper filed. Site coordinator approval required.
In this situation, community property rules can be disregarded.

32. Role Play
John Doe, a taxpayer at your volunteer site, has indicated on the Intake Sheet that he is married but has not lived with his spouse during the last 6 months of the tax year. He does not qualify for HOH.
What questions would you ask to determine John’s eligibility for the volunteer program?
Instructor takes the part of John Doe; students take turns asking questions. Possible questions and answers:
Do you and your spouse wish to file a joint return? No, we’ve been separated for a long time.
How long have you been separated from your spouse? 2 years; I don’t know where she’s living. I would get a divorce, but I can’t afford it.
Do you have any financial dealings with your spouse? No
Do you have your spouse’s SSN? Yes
John is eligible for the volunteer program.
At end of role play, hand out Guidelines for Preparing Married Filing Separate Returns document and review with class.

33. Preparing the Return
on TaxWise

34. Starting a Return Beginning the return
Note that spouse’s SSN is not input in this section

35. Choosing Filing Status
After selecting MFS, enter spouse’s name and SSN on the MAIN INFO sheet, and answer the questions where fields are red

36. Choosing Filing Status
Point out answers to arrowed items

37. Choosing Filing Status
Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, will appear on the tree in red

38. Allocating Income on Form 8958
Fill in name and SSN of spouse
All income is allocated to taxpayer, none to spouse.
F3/CTRL Space (clear red) the red fields in column 3

39. Columns 1, 2 & 3
The amounts in column 1 (Total Income…) and column 2 (Allocated to Spouse…) should be the same
The headings for columns 2 and 3 may be confusing, as they both refer to “spouse”
For in-scope returns, all income must be allocated to the taxpayer (column 2)

40. Printed form is clearer than TaxWise worksheet
Has names and SSN’s of taxpayer and spouse on form

41. Completing Form 8958
Be sure to complete pages 1 and 2 of Form 8958

42. On Form 1040, Line 39b, F3/CTRL Space (clear red) the MFS box
Completing the Form 1040
You have to check the box, then uncheck it before hitting F3.
If taxpayer knows that the spouse itemizes, simply check the box. In that case taxpayer needs to itemize or will lose standard deduction.
On Form 1040, Line 39b, F3/CTRL Space (clear red) the MFS box

43. California Form 540
No additional input is necessary on Form 540. Note that FTB does not require Form 8958.

44. Printed Form 1040
Note location of spouse’s SSN and name on taxpayer’s copy of return

45. Non-Resident Alien Spouse
Hand write “NRA” in spouse’s Social Security Number field
NRA
If spouse is a non-resident alien with no SSN/ITIN, hand write “NRA” in spouse’s social security number field; paper return filed.
Emphasize: If have spouse’s TIN, can e-file.

46. Location of spouse’s SSN and name on page 1 of Form 540
Printed Form 540
Location of spouse’s SSN and name on page 1 of Form 540
If NRA spouse, write NRA in spouse’s ssn field; paper return filed

47. Exercise # 7
Q: Where do you input the spouse’s name and SSN on a MFS return?

48. Exercise # 7
Q: Where do you input the spouse’s name and SSN on a MFS return?
A: After selecting MFS, enter spouse’s name and SSN on the MAIN INFO sheet, and answer the questions where fields are red

49. Exercise # 8
Q: After answering the questions relating to residency in a community property state on the MAIN INFO Sheet, what form will appear in the TaxWise tree?

50. Exercise # 8
Q: After answering the questions relating to residency in a community property state on the MAIN INFO Sheet, what form will appear in the TaxWise tree? A: The Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, will appear on the tree in red.

51. Exercise # 9
Q: For a MFS return to be within the scope of VITA/TCE, to whom must all of the income on the return be allocated?

52. Exercise # 9
Q: For a MFS return to be within the scope of VITA/TCE, to whom must all of the income on the return be allocated?
A: For in-scope returns, all income must be allocated to the taxpayer (column 2 of Form 8958).

53. Exercise # 10
Q: Where is the checkbox to indicate whether your spouse itemizes his/her deductions?

54. Exercise # 10
Q: Where is the checkbox to indicate whether your spouse itemizes his/her deductions?
A: On Form 1040, Line 39b, F3/CTRL Space (clear red) the MFS box. You have to check the box, then uncheck it before hitting F3. If taxpayer knows that the spouse itemizes, simply check the box.

55. Exercise # 11
Q: Does the Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, need to be sent to the Franchise Tax Board with the Form 540?

56. Exercise # 11
Q: Does the Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, need to be sent to the Franchise Tax Board with the Form 540?
A: No, the FTB does not require Form No additional input is necessary on Form 540.

57. Summary
Taxpayers come to VITA/TCE sites wanting to file separately for a variety of reasons.
To be considered unmarried, a taxpayer must be either divorced under a final decree by 12/31 OR legally separated under a divorce or separate maintenance decree by 12/31.
Generally, VITA/TCE sites in California do not prepare MFS returns because of community property rules.
Whether income is community property or not depends on the type of income and the domicile of the person earning it.

58. Summary
VITA/TCE volunteers generally should not be making determinations of community property and/or domicile; when in doubt, refer to a paid preparer.
Four (4) conditions must be met for a VITA/TCE site to prepare a MFS return:
Taxpayer lived apart from spouse the entire tax year and has NO intention of reconciliation
No commingling of funds
Name and SSN (or ITIN) of spouse available
Site coordinator must approve the MFS filing status

59. Summary
If a taxpayer’s spouse does not have a TIN because he/she is a non-resident alien and lives in a foreign country, put NRA in the SSN field. However, the taxpayer cannot claim a personal exemption for the spouse and the return must be paper filed.
On a MFS return, the spouse’s name and SSN/ITIN is entered in the Filing Status section of the MAIN INFO sheet on TaxWise. Additionally, several questions must be answered regarding the taxpayer’s residency in a community property state.

60. Summary
Income must be allocated on the Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States. For in-scope returns, all income must be allocated to the taxpayer.
The checkbox to indicate whether the taxpayer’s spouse itemizes is on Form 1040, Line 39b. If the spouse does not itemize or if it is unknown, F3/CTRL Space (clear red) the MFS box.
The FTB does not require Form No additional input is necessary on Form 540.

61. Questions??????