Contributed by: KiaraB, FreeTaxUSA Agent, Tax Pro
Filing as Married Filing Separately (MFS) usually isn’t a big deal. But if you live in a Community Property State, it gets more complicated.
Most married couples file a joint return because it’s generally more tax advantageous for them. But sometimes, you might want to file separately. For example, if you don’t want to be responsible for your spouse’s taxes or if you want a lower Adjusted Gross Income (AGI) to qualify for certain government programs, filing separately may be the best choice for you.
Do you live in a community property state?
Community Property States are the following states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
When you live in a community property state, most property and income you acquire during the marriage is owned by both spouses. This means on your federal and state returns if you’re filing married filing separately, you need to report half of all community income and all your separate income on your tax return. If you are filing a joint return, you don’t need to separate it because all the income is reported on one return. It’s much easier to file a joint return.
What is considered joint and separate property depends on the state. Publication 555, Table 1 has a good general summary of what is and isn’t community property. However, make sure to look up your state’s laws for any specific rules before filing your tax return.
How to file married filing separately in a community property state in FreeTaxUSA software
Filling out Form 8958
The first step before preparing your tax return is to fill out Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States. Currently, FreeTaxUSA doesn’t fill it out for you so you may need to print it out.
The form has four columns. The first column is for you to enter the income source. The second column is for the total income from that source for both spouses. The third column is for one spouse to enter their share of the income, and the fourth column is for the other spouse to do the same. The amounts in the third and fourth columns should add up to the amount in the second column.
You will need to split any community property income such as wages, interest, dividends, retirement, social security, etc. Refer to the instructions on Form 8958 for more details.
Example:
Jack earned $40,000 from Employer A. Jill, who also works for Employer A, earned $36,000. In column one under Wages, they would enter the Employer’s name. They would then enter $76,000 in the second column as that is their total income. Jack and Jill got married during the tax year. Jack earned $16,000 of his $40,000 before he got married. Jill didn’t start working for Employer A until after she got married. So $16,000 of Jack’s wages is considered separate property and his remaining $24,000 is considered community property. All of Jill’s income from Employer A is considered community property since she earned it while married.
To figure out the total community property, take the $76,000 and subtract $16,000 (Jack’s amount of separate income). We are now left with $60,000 of community property income from Employer A. We would then divide that amount in half between Jack and Jill. They each need to report $30,000 in community property. Since Jill didn’t have any separate property, $30,000 will go in her column for Employer A. Jack, however, needs to add his $16,000 in separate property to his $30,000 in community property. He will Enter $46,000 in his column.
Entering your tax information into our software
Once you have completed Form 8958, you can start your return in our software. You will create one FreeTaxUSA account per spouse. You can’t file both returns on a single account.
Just so you are aware, there will be a few alerts and screens that will pop up in our software as enter your information. Here is what they look like:
This screen will appear right after the dependents page:
If you have community property, say Yes and proceed to the next page. There you will see a handful of yellow alerts.
They are letting you know that you can’t e-file when filing as Married Filing Separately in a Community Property state in our software and that you shouldn’t include your spouse’s share of community property income on your personal tax return.
When you enter your tax forms, you’ll adjust your W-2s and 1099’s. Instead of reporting the amounts shown on the tax form, report your share of the income and, if applicable, the taxes withheld.
Example:
Going back to Jack and Jill, they would enter their W-2 but use the amounts from their completed Form 8958 when filling out the W-2 boxes 1 (Wages and Tips) and 2 (Federal Income Tax Withholding). So, Jack would enter $46,000 in his box 1 on his tax return and Jill would enter $30,000 for her box 1 on her tax return. They would also need to enter their portion of Social Security wages/withholdings and Medicare Wages/withholdings, etc. while filling out their W-2. You may have more boxes filled out on your tax forms, like box 12 on your W-2. If they impact another credit or deduction later on in our software, you may need to adjust the amounts in those other boxes, so you are getting the correct amount of credit or deduction.
If you don’t have the same type of form as your spouse, use their form to enter your share of the income into our software. The important thing is that you report your share of the income. You’ll include copies of your spouse’s tax forms so the IRS can see who originally received the income.
Do the same for your other tax forms and credits. Sometimes, it can be hard to calculate certain tax credits, so you may want to consult a tax professional if you need additional help as this is not a service we provide.
Filing your return
Once you are done entering in your information, you will need to file your return. Since you need to include Form 8958 and other forms, you’ll mail your return to the IRS and state instead of e-filing it.
When mailing your return, remember to keep a copy for your records. Please make sure to include the following:
- Your tax return
- Your tax forms
- Photocopies of your spouse’s tax forms
- Form 8958
Congratulations! You have successfully filed a Married Filing Separately return.
Other things to note when you are filing separately:
- Both spouses must claim either the standard deduction or the itemized deductions. One spouse cannot itemize while the other spouse takes the standard deduction.
- You generally don’t qualify for many common credits, such as the earned income credit (EIC), education credits, and the child and dependent care credit (there are some exceptions).
- If you have a dependent, only one spouse can claim the dependent on their tax return. You can’t claim the same dependent twice or on two separate tax returns.
- Many deductions, such as the Standard Deduction and Capital Loss Deduction, are half of what you get if you were to file jointly.
- See Special Rules under married filing separately on Publication 501 for the full list.
