Preparing a Federal Income Tax Return
The following discussion does not apply to spouses meeting the conditions under Spouses
living apart all year. Those spouses must report their community income as explained in
that discussion.
Joint return versus separate returns. Ordinarily, filing a joint return will give you the
greater tax advantage. But in some cases, your combined income tax on separate returns may
be less than it would be on a joint return.
You can file separate returns if you and your spouse do not agree to file a joint return
or if separate returns result in less tax. However, if you file separate returns:
1) Your spouse should itemize deductions if you itemize deductions because he or she
cannot claim the standard deduction.
2) You cannot take the credit for child and dependent care expenses in most instances.
3) You cannot take the earned income credit.
4) You cannot exclude any interest income from Series EE U.S. Savings Bonds that you used
for higher education expenses.
5) You cannot take the credit for the elderly or the disabled unless you lived apart from
your spouse for all of 1997.
6) You may have to include in income more of the social security benefits (including any
equivalent railroad retirement benefits) you received in 1997 than you would on a joint
return.
7) You cannot take the credit for adoption expenses in most instances.
Figure your tax on both a joint return and separate returns under the community property
laws of your state. Compare the tax figured under both methods and use the one that
results in less tax.
If you file separate returns, you and your spouse must each report half your combined
community income and deductions in addition to your separate income and deductions. List
only your share of the income and deductions on the appropriate lines of your separate tax
returns (wages, interest, dividends, etc.).
Attach a worksheet to your separate returns showing how you figured the income,
deductions, and federal income tax withheld that each of you reported. An allocation
worksheet, shown later, may be used for this purpose. If you do not attach a worksheet,
each taxpayer should attach a photocopy of the other spouse's Form W-2 or 1099-R. Make a
notation on the form showing the division of income and tax withheld.
If you and your spouse file separate returns, an extension of time for filing your return
does not extend the time for tiling the separate return of your spouse. If you and your
spouse file a joint return, you cannot file separate returns after the due date for filing
that return has passed.
Identifying Income and Deductions
To figure the best way to file your return -- jointly or separately -- you must identify
your community and separate income and deductions according to the laws of your state.
Community income exempt from federal tax generally keeps its exempt status for both
spouses. For example, under certain circumstances, income earned outside the United States
is tax exempt. If you earned income and met the conditions that made it exempt, the income
is also exempt for your spouse even though he or she may not have met the conditions.
Military retirement pay. State community property laws apply to military retirement pay.
Generally, the pay is either separate or community income based on the marital status and
domicile of the couple while the member of the Armed Forces was in active military
service.
Pay earned while married and domiciled in a community property state is community income.
This income is considered to be received half by the member of the Armed Forces and half
by the spouse.
Civil service retirement. For income tax purposes, community property laws apply to
annuities payable under the Civil Service Retirement Act (CSRS) or Federal Employee
Retirement System (FERS).
Whether a civil service annuity is separate or community income depends on the mantel
status and domicile of the employee when the services for which the annuity is paid were
performed. Even if you are now living in a noncommunity property state and you receive a
civil service annuity, it may be community income if it is based on services you performed
while married and domiciled in a community property state.
If a civil service annuity is a mixture of community income and separate income, it must
be divided between the two kinds of income. The division is based on the employee's
domicile and marital status in community and noncommunity property states during his or
her periods of service.
Example. Henry Wright retired last year from civil service after 30 years of service. He
and his wife were domiciled in a community property state during the last 15 years of that
service.
Since half the service was performed while the Wrights ware married and domiciled in a
community property state, half the civil service retirement pay is considered to be
community income. If Mr. Wright receives $1,000 a month in retirement pay, $500 is
considered community income--half ($250) is his income and half ($250) is his wife's.
Lump-sum distributions. If you receive a lump-sum distribution from a qualified retirement
plan, you may be able to choose optional methods of figuring the tax on the distribution.
You may be able to use the 5-year or 10-year tax option. You must disregard community
property laws for either tax option. For information, see Publication 575, Pension and
Annuity Income, and Form 4972, Tax on Lump-Sum Distributions.
Gains and losses. Gains and losses are classified as separate or community depending on
the character of the property. For example, a loss on separate property, such as stock
held separately, is a separate loss. On the other hand, a loss on community property, such
as a casualty loss to your home held as community property, is a community loss.
Sea Publication 544, Sales and Other Dispositions of Assets, for information on gains and
losses. See Publication 547, Casualties, Disasters, and Thefts (Business and Nonbusiness),
for information on losses due to a casualty or theft.
Individual retirement arrangements (IRAs). When you and your spouse file separate returns,
your contributions to an IRA must be based on your own compensation. Your contributions
are limited to the lesser of your compensation or $2,000. When filing jointly, the
contributions of the spouse with less compensation can be based on the combined
compensation of both spouses, reduced by the amount allowed as an IRA deduction to the
higher income spouse. Assuming your combined compensation for the year is at least $4,000,
both you and your spouse can contribute up to $2,000 to an IRA, for a maximum contribution
of $4,000. For information on IRAs, see Publication 590, Individual Retirement
Arrangements (IRAs) (Including SEP-IRAs and SIMPLE IRAs).
Personal exemptions And dependents. When you tile separate returns, you must claim your
own exemption ($2,650 in 1997).
You cannot divide the amount allowed as a deduction for a dependent between you and your
spouse. When you have more than one dependent supported by community funds, you and your
spouse may divide the number of dependents between you in any manner you choose.
Example. Ron White supports his wife and three dependent children with community funds. If
he and his wife tile separately, only he can claim his own exemption, and only his wife
can claim her own exemption. By agreement, Ron may claim any or all three exemptions for
his children and his wife may claim any remaining children, or his wife may claim any or
all three exemptions for her children and Ron may claim any remaining children. They
cannot divide the total deduction amount for their three children ($7,950) equally between
them.
Self-employment tax. If any of the income from a trade or business other than a
partnership is community income under state law, it is subject to self-employment tax as
the income of the spouse carrying on the trade or business.
Partnership income. If you are a partner and your distributive share of any income or loss
from a trade or business carried on by the partnership is community income, treat the
share as your net earnings from self-employment. No part is treated as net earnings from
self-employment by your spouse. If both you and your spouse are partners, each of you must
claim your share when figuring net earnings from self-employment for self-employment tax
purposes.
Earned Income credit. For purposes of the earned income credit, compute your earned income
without regard to community property laws. You cannot claim this credit if your filing
status is married filing separately.
For more information about the credit, see Publication 596, Earned Income Credit.
Withholding tax. Report the credit for federal income tax withheld on community wages in
the same manner as your wages. If you and your spouse file separate returns on which each
of you reports haft the community wages, each of you is entitled to half the income tax
withheld on those wages.
Overpayments. Overpayments are allocated under the community property laws of the state in
which you are domiciled.
• If community property is subject to premarital or other separate debts of either
spouse, the full joint overpayment may be used to offset the obligation.
• If community property is not subject to premarital or other separate debts of
either spouse, the portion of the joint overpayment allocated to the spouse liable for the
obligation can be used to offset that liability. The portion allocated to the injured
spouse can be refunded.
Estimated tax. In determining whether you must pay estimated tax, apply the estimated tax
rules to your estimated income. These rules are explained more fully in Publication 505.
If you think you may owe estimated tax and want to pay the tax separately, determine
whether you must pay it by taking into account:
1) Half the community income and deductions,
2) All of your separate income and deductions, and
3) Your own exemption and any exemptions for dependents that you may claim.
Whether you and your spouse pay estimated tax jointly or separately will not affect your
choice of filing joint or separate income tax returns.
If you and your spouse paid estimated tax jointly but want to file separate income tax
returns, either of you may claim all of the estimated tax paid, or you may divide it
between you in any way that you agree upon.
If you cannot agree on a division, the estimated tax you can claim is equal to the total
estimated tax paid times the tax shown on your separate return divided by the total tax
shown on your return and your spouse's return.
Example
Walter and Mary Smith are married and domiciled in a community property state. Their two
minor children and Mary's mother live with them and qualify as their dependents. Amounts
paid for their support were paid out of community funds.
Walter received a salary of $38,160. Income tax withheld from his salary was$3,360. Walter
received $94 in taxable interest from his savings account. He also received $155 in
dividends from stock that he owned. His interest and dividend income is his separate
income under the laws of his community property state.
Mary received $140 in dividends from stock that she owned. This is her separate income. In
addition, she received $3,000 as a part-time dental technician. No income tax was withheld
from her salary.
The Smiths paid a total of $3,850 in medical expenses. Medical insurance of $700 was paid
out of community funds. Walter paid $3,150 out of his separate funds for an operation he
had.
The Smiths had $6,842 in other itemized deductions, none of which were miscellaneous
itemized deductions subject to the 2% adjusted gross income limit. The amounts spent for
these deductions were paid out of community funds.
To see if it is to the Smiths' advantage to file a joint return or separate returns, a
worksheet (shown next) is prepared to figure their federal income tax both ways. Walter
and Mary must claim their own exemptions on their separate returns.
The summary at the bottom of the worksheet compares the tax figured on the Smiths' joint
return to the tax figured on their separate returns. The result is that by filing
separately under the community property laws of their state, the Smiths save $184 in
income tax.
If the Smiths were domiciled in Idaho, Louisiana, Texas, or Wisconsin, the result would be
slightly different because in those states income from separate property generally is
treated as community income. If they lived in one of those states, the interest on
Walter's savings account and the dividends from stock owned by each of them would be
divided equally on their separate returns.
Table 1. Worksheet--Walter and Mary Smith
Joint Return
Income (Walter's):
Salary $ 38,160
Interest and dividends ($155 dividends 249
+ $94 interest)
________
Total $ 38,409
Income (Mary's):
Salary $ 3,000
Dividends 140
________
Total 3,140
________
Adjusted gross income (AGI) $ 41,549
________
Deductions (Community) Not subject
to the 2% AGI limit $ 6,842
Deductions (Medical):
Premiums $ 700
Medical expenses (Walter's) 3,150
________
Total $ 3,850
(Minus) 7.5% of AGI (3,116)
________
Medical expense deduction $ 734
________
Total deductions $ 7,576
________
Substract total deductions from AGI/1/ $ 33,973
(Minus) exemptions/2/ $(13,250)
________
Taxable Income $ 20,723
========
Tax/3/ $ 3,109
(Minus) federal income tax withheld (3,360)
________
Overpayment $ (251)
========
Table 1. Worksheet--Walter and Mary Smith (continued)
Separate Returns
Walter's Mary's
Income (Walter's):
Salary $ 19,080 $ 19,080
Interest and dividends 249 -0-
($155 dividends + $94 interest)
________ _______
Total $ 19,329 $ 19,080
Income (Mary's):
Salary $ 1,500 $ 1,500
Dividends -0- 140
_______ _______
Total 1,500 1,640
________ ________
Adjusted gross income (AGI) $ 20,829 $ 20,720
________ ________
Deductions (Community) Not subject $ 3,421 $ 3,421
to the 2% AGI limit
Deductions (Medical):
Premiums $ 350 $ 350
Medical expenses (Walter's) $ 3,150 -0-
________ ______
Total $ 3,500 $ 350
(Minus) 7.5% of AGI (1,562) (1,554)
________ _______
Medical expense deduction $ 1,938 $ -0-
_______ _______
Total deductions $ 5,359 $ 3,421
_______ _______
Substract total deductions from AGI/1/ $ 15,470 $ 17,299
(Minus) exemptions/2/ $ (5,300) $(7,950)
________ ________
Taxable Income $ 10,170 $ 9,349
======== ========
Tax/3/ $ 1,526 $ 1,399
(Minus) federal income tax withheld (1,680) (1,680)
________ ________
Overpayment $ (154) $ (281)
======== ========
/1/ The itemized deductions are greater than the standard
deduction of $6,900 for married filing jointly and $3,450 for married
filing separately. Note: If one spouse itemizes, the other
must itemize, even if one spouse's deductions are less than the
standard deduction.
/2/ An allowance of $2,650 for each exemption claimed is
subtracted--5 on the joint return, 2 on Walter's separate return, and
3 on Mary's separate return.
/3/ The tax on the joint return is from the column of the
Tax Table for married filing jointly. The tax on Walter's and Mary's
separate returns is from the column of the Tax Table for married
filing separately.
Table 1. Summary
Tax on Joint return $3,109
Tax on Walter's separate return $1,526
Tax on Mary's separate return 1,399
______
Total tax filing separate returns 2,925
______
Total savings by filing separate returns $ 184
======
Table 2. Allocation Worksheet
1 2 3
Total Allocated Allocated
Income to Husband to Wife
(Community/
Separate
1. Wages (each employer)
2. Interest Income
(each payer)
3. Dividends (each payer)
4. State Income Tax
Refund
5. Capital Gains
and Losses
6. Pension Income
7. Rents, Royalties, Part-
nerships, Estates, Trusts
8. Taxes Withheld
9. Other items such as:
Social Security Benefits,
Business & Farm Income or
Loss, Unemployment
Compensation, Mortgage
Interest Deduction, etc.