Discussion:1040 - MFJ, 540NR (California) - MFS?
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Discussion Forum Index --> Advanced Tax Questions --> 1040 - MFJ, 540NR (California) - MFS?
Discussion Forum Index --> Tax Questions --> 1040 - MFJ, 540NR (California) - MFS?
| 16 October 2009 | |
| I'm working on a return for a client who is married, but has lived apart from spouse for all of 2008. They live in different states. My client lives in California.
My client has $60,000 in W2 income from California (only source of income). My client's spouse has $200,000 in W2 from the other state (only source of income). Combined Form 1040 AGI = $260,000. Note: On joint return, there is a rental loss of $21,000 which is disallowed due to PAL limitations. Federal return has been filed. No issues. On the instructions for California 540, it states that "married taxpayers who file a joint federal income tax return may use married filing separately status on their California return if either spouse was a nonresident for the entire year and had no income from California sources during the year." My client's spouse meets this criteria. I'm considering filing separately for my client for California purposes. Income is not community property since the couple lived separately the whole year with no intent of getting back together. There is a disagreement between my coworker and I on this issue. My belief is that my client will file Form 540NR using filing status MFS and report $60,000 of income minus the rental loss she will be able to take due to MFS income being less than $75,000. The total tax = $1,794, withholding = $1,950 and a refund = $156. My coworker believes I need to include the spouse's $200,000 income on form 540NR, and then use the filing status MFS. The California source income is 23% of the total income. The total tax in this situation is $4,500 and as a result my client will owe $2,550. This doesn't make sense to me. I have two questions that I hope you guys can help me on. 1. Am I filing the 540NR correctly for California by reporting only my client's portion of the income. 2. Am I allowed to include the rental loss in the California calculation due to MFS that was not allowed for the joint federal return? Thanks for the help. I hope everyone had a great tax season. | |
| 16 October 2009 | |
| You're right with respect to the earnings (salaries), which are the separate income of the spouses from the date they separated with no intention to resume the marital relationship. On W's MFS return you would not include H's income to calculate the tax liability.
The rental loss is not so clear. Where is the property located? How is the title to it held? Hard to see how W could get more than half of the loss unless it is titled in her name as her separate property. Also, if it is located in California, arguably H has California source income (even though negative) and they cannot file separately unless they file separate federal returns. | |
| 16 October 2009 | |
| Thanks for the help Katie.
The property is located in the state where my client's spouse resides (not California and not in a community property state) so my client's spouse has no California source income. The title to the rental property is in both of their names. I calculated half of the rental loss and half of the prior year disallowed deductions due to PAL limitations to her. I only deducted the allowable rental loss due to PAL limitations for married filing separately which is $12,500 * (75,000 - 60,000) / (75,000 - 50,000) = $7,500. | |
| 19 October 2009 | |
| Client will file 540NR and because couple lived apart for all of 2008 a partial deduction of the $21,000 rental loss will be allowed for CA. CA modified AGI $60K. Allowable rental loss $7,500 (of the $10,500 share of $21,000 rental loss). AGI CA $52,500. Note: the rental loss was allowed because MFS income under $75K but phaseout starts at $50K for MFS (versus $100K for MFJ) so only $7,500 deductible loss. Total tax you calculated ($1,794) does not sound correct unless other items missing. | |
