Category: Tax Returns, Examinations & IRS Procedure;
Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background/Issue -Husband earned $650,000 for 1995. -Wife had a $4,000 loss from an art business. -Each spouse has separate property dividend and interest income. -Extension for 1995 tax year filed for a joint return. Husband paid the extension payment from his separate funds. The situation between the parties is such that a joint return will not be filed. The issue is how to file separate returns for each spouse, i.e., what income to report on each return. Discussion In general, the community property rules apply as long as the two are married. It is possible in some states to "dissolve the community" by agreement prior to divorce. I assume that was not done in this case. In general, if married taxpayers elect to file separate returns, each reports half the community income. If the general rule applies in this case, the husband would report half of the $650,000 salary and withholding and the wife the other half. Presumably, the husband would take credit for the extension payment In addition, each spouse would report his or her own separate income, such as the dividends and interest you mentioned. Because the general rule set forth above could create inequities when spouses separate, Internal Revenue Code Section 66(a) provides a special rule which allocates community income to the spouse to whom it is attributable. IRC Section 66(a) is applicable only if the all following conditions are met. -The parties are married at any time during a calendar year; -live apart at all times during the year; Obviously two of these requirements present a problem. First, there is dispute as to when the separation occurred. Second, I wonder whether there was any transfer of community income from the husband to the wife. If there was not, I wonder how she maintained herself. It seems to me that the wife could potentially suffer from the normal operation of the community property rules whereby the she is required to report half the husband's salary income. It seems further that her claim regarding the separation date is contrary to her interests with respect to this narrow issue. I think at this point it would be a good idea for us to discuss this by phone at your convenience. |
