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Discussion:CA RDPs, Community Property, 2 kids, HOH?

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Discussion Forum Index --> Advanced Tax Questions --> CA RDPs, Community Property, 2 kids, HOH?


Discussion Forum Index --> Tax Questions --> CA RDPs, Community Property, 2 kids, HOH?

PhilHebner (talk|edits) said:

24 February 2011
I have RDP clients that have 2 kids.

With the Community Property rules, several issues are appearing... yes, I've reviewed the boards and yes this is my first post.

The one issue I'm most concerned about is the Head Of Household rule #2 ...

You paid more than half the cost of keeping up a home for the year.

Technically, there can be no head of household if there is a tie. Reasonably, one head of household makes sense... but will it hold up? Aggressively, 2 kids, 2 hoh...

I have discussed this with several professionals here in California, and need better input before submitting to IRS. The CPA who will sign this return is happy with 2 HOHs... I am not so sure.

This is a beautiful tax return, there are more community property issues in this return, but they can wait.

Trillium (talk|edits) said:

24 February 2011
"Beautiful tax return" - I will have to keep that phrase in mind. Thanks for searching the boards; I'm sure you also found the little Category: Domestic Partner recap page. It's not well-named, but at least we've been trying to keep it up-to-date.

Did you also review the prior discussions on having 2 HOH non-RDP taxpayers in one house? I think the consensus was that it's pretty tough, but possible if they really are separate family entities. But if they're RDP - or partners at all - claiming separate family entities is more than a stretch. As to whether one of the two could be HOH, even with each partner now reporting exactly half of the CP income, I don't think there have been any objections to that (all other qualifications met). Let's see how others respond and I'll come back in a while with links to the 2HOH/1house discussions I mentioned (so if you've already read those, please stop me before I go looking!)

Here are the links I mentioned:

PhilHebner (talk|edits) said:

24 February 2011
Yes, I will stick with "beautiful tax return".

I will check the RDP recap page. Thanks for that. I will also recheck the 2 HOH for non-RDP.

In this case, they are clearly merging their households. I have an adoption credit. And daycare. Fun, huh? And some nice passive losses are likely to be released on their Federal tax returns (maybe 50K for their rentals, compared with their pro-forma joint return for CA). Still waiting for their K-1s.

Thanks T.

Trillium (talk|edits) said:

24 February 2011
Sounds a lot like the RDP returns Joanmcq has been posting about. Beautiful, indeed.

If they're clearly merging their households, then 2 HOH is clearly out of the picture. Don't bother reading those links, then, unless you need backup to convince somebody else of that fact.

PhilHebner (talk|edits) said:

24 February 2011
Thanks again Trillium.

It did not hurt me to read the references. Backup is what I need on no 2 HOHs. (don't sound that out... like I tried to do.)

I'm still thinking I don't even have one HOH.

Hmmm....

Kevinh5 (talk|edits) said:

24 February 2011
Are you CERTAIN that one person didn't pay ONE DOLLAR of household expenses from separate property during the year? Seems like that would be easy to find and therefore create a HOH situation.

Trillium (talk|edits) said:

24 February 2011
I suppose I should clarify, you are asking about filing federal with one HOH, right? Because of course, California does not allow it: "Can an RDP who lives with their partner and files head of household (HOH) for federal purposes use the HOH filing status for state purposes as well?

If your RDP lived with you and your child, stepchild, adopted child, or eligible foster child, at any time during the last 6 months of the year, you do not qualify to use the HOH filing status for California purposes."


For federal, draw an analogy from EITC - in the new Pub 555 (sorry for citing a pub, but I'm drawing an analogy here, anyway!) on the bottom right of page 6, it explains how a HOH RPD calculates EITC with just their income (not CP income). So wouldn't the HOH household expenses calculation be done in the same manner?

PhilHebner (talk|edits) said:

24 February 2011
Hi Kevin,

Been reading your posts for 3 years. Thanks for your support on so many issues.

Community Property does make it kinda hard to find that ONE DOLLAR. Maybe rounding? Hmmm... Maybe not.

Phil

Kevinh5 (talk|edits) said:

24 February 2011
one dollar paid from separate property was what I was hoping to find

PhilHebner (talk|edits) said:

24 February 2011
Yes Trillium, I am only concerned with Federal. They are filing MFJ/RDP on their CA.

Still, that community property expense of one dollar eludes me.

PhilHebner (talk|edits) said:

24 February 2011
This discussion is rapid-fire. Thanks.

OK, if I go down the separate property route... The Sched-E rental with passive losses have been brought into this union by one partner on title, mortgage and all... (OK 3 rentals some from Taxpayer some from Spouse, but i do not need them all for this example). So I could argue $1 separate... ummm... no... If I married a nice gal in CA with rental property... and divorced the next day (it's just make believe, ok?) Half would be mine... community property.

Pub analogies do not scare me...

Trillium (talk|edits) said:

24 February 2011
Well, the bit in Pub 555 gives me hope for another way for two reasons. First, it acknowledges that you can have an RDP HOH even after applying CP rules. Second, it says that you ignore CP rules to calculate earned income for EITC. So ignore CP rules to calculate who paid what of the household expenses. (This is an alternative method from Kevin's separate property method, which is probably a stronger way to go, but doesn't seem to be helping in your case.)

If CP rules were not in place, do you have a clear HOH? Then perhaps you still do, even after CP rules are in place for income tax reporting?

PhilHebner (talk|edits) said:

24 February 2011
Yes, if no CP, then clear HOH. No EITC so I am happier not attempting that argument.

The Pub 555 page 6, relates to separating couples and HOH for EITC. I did not see any other analogies that will help yet... still open minded.

My sense of it all is that IRS is still sorting out the unintended consequences. If I pick 1 HOH, then I have several arguments for the one I pick. On the other hand, maybe I do not have any HOH.

EZTAX (talk|edits) said:

24 February 2011
Interesting dilema. I agree technically if exactly 1/2 and 1/2 it would be a theoretical problem but agree with Tax Wrtier that I don't think you will get any complaints. All it would take is a $10 gift from grandma at Christmas used for support to put it over the 1/2 requirement. Since you do have seperate property then there really is no issue.

Also agree cannot have two HH in this case. They are obviously one "economic unit".

PhilHebner (talk|edits) said:

24 February 2011
Thanks for the "gift from grandma" idea. Nice way to flip the coin for 1 HOH.

While there is separate title, it is still community income and property for federal tax return purposes... All intents are to merge everything. Both kids under 5-yrs have Taxpayer-Spouse hyphenated last names. No where to hide on this. (Does "Beautiful Tax Return" still fit?)

I'm still open minded.

EZTAX (talk|edits) said:

24 February 2011
"While there is separate title, it is still community income and property for federal tax return purposes" I thought income from seperate property was seperate?

PhilHebner (talk|edits) said:

24 February 2011
Hi EZTax,

Seriously, and I am open for discussion on this... And I am not a lawyer...

In this country, we commonly use the term community property loosely depending on whether it is a casual conversation, a federal tax conversation, a California tax conversation, a family law conversation, and a bankruptcy conversation.

Our friends in congress and in the courthouses in 50 states have not come to an agreement on the term community property.

So, just one example... In ca, I have a friend who got divorced 2 years ago... She was paying on a loan that was in his name... After the divorce... She called the bank who told her she was not responsible for this loan... She though that because it is a community propert state, she was responsible for her husbands loans. Apparently not. Why? I do not know yet.

Another example, for federal taxes, a married couple brings separate income-producing property to you... Do you file MFJ? Or MFS? Do you use the separate income to determine support for depedants?

This community property issue is not simple or clear from what I can tell so far.

The original question I put out for discussion is... If community property rules apply in community property states for registered domestic partners, then how many head of household can you have? The possible answers are 0, 1, and 2. 2 seems out of the question. 0 seems to meet the rules. 1 could be argued for, but does not fit the hoh rule of "more than half of household expenses".

Again, this couple is merging everything financial, which is the substance over the form.

So, what position would you take on it?

(signed)

Phil, with the beautiful tax return.

Joanmcq (talk|edits) said:

25 February 2011
Well, not all income is community property. From what I've determined, SS (especially if earned before the union), pensions if earned before the union, and of course, any property that was not comingled is separate. One of the odd things I'm having is that I have returns where one partner is on SS, and the other works and earns a good salary. Since the SS isn't community (she was disabled before they became RDPs), the partner that previously had no filing requirement will actually be showing more income on her return than her partner.

So if they had a kid (this particular couple doesn't, but I've got several that do), who is HOH? I would thing the one that earned the most income.

BTW, separate property can only be kept separate if not tainted by community funds. So Phil, if you married me and divorced me a day later, my property would remain separate unless you paid my mortgage for that day. In CA, income from separate property is separate as long as not comingled, and the community ends as soon as the couple separates (one moves out) with no intent to reconcile. In AZ however, the community doesn't end til divorce, and in TX, income from separate property is community.

Spidell had a nice webinar I just took on demand (albeit info about 6 month old) that did go into the community issues pretty well.

PhilHebner (talk|edits) said:

25 February 2011
Hi Joanmcq,

I will look into whether these clients have separate income. Even the cash from social security can be commingled given a common back account. But, that commingling will be after the income is assigned for tax purposes.

So for federal income tax purposes, w-2 wages are clearly going to be split evenly. I will look for separate bank accounts for the rental properties. I will confirm the intention of the two partners. Anything else I should consider before discussing this further with the clients?

I wanted to consider the facts before playing with the tax return results... I do not want to be swayed by the monies.

Thanks for helping clarify the dang community property rules in my mind. Fortunately this couple has only resided in California. It simplifies things a bit.

I'm sensing a webinar or two in my near future...

EZTAX (talk|edits) said:

25 February 2011
I am also not a lawyer and admit that I find the community property rules confusing. Have you read the IRS pub on it?

I had a return last week similar to Joan's above. RDP, one working the other on SS. My research confirmed Joan's - that the SS income is considered separate with the same result. The client on SS had a larger income than the working client after allocating 1/2 the W-2 income.

While I agree with Joan above that separate property can be "tainted" once community funds are used in the maintenance, improvement or loan payments, I don't believe it is then 100% community property but rather a small percentage of the property becomes community property. The laws on this are clear if you are a lawyer since this is what is argued about in divorces.

Phil - "In this country, we commonly use the term community property loosely depending" This might be true but for tax and legal purposes it is not a "loose" term (though its technical application is often ignored). Many clients are shocked and confused when I tell them that they can't just file MFS in California without applying the community property rules - "but my last tax preparer never mentioned it"! There are rules regarding ignoring the community property laws if you can't get the proper info and we have had past discussions on this.

PhilHebner (talk|edits) said:

25 February 2011
Hi EZTax,

Yes, I've read pub 555... There is at least one more reading in my future... Like a good mystery, I expect new nuances to appear each time.

I thought your comment... The laws are clear if you are a lawyer, that's why they argue... Was funny! Thanks!

I also think clients practice that phrase... Just prior to switching to my office... Your's too I see.

Thanks for the further confirmation and details.

Phil

Joanmcq (talk|edits) said:

27 February 2011
When I mentioned 'tainted', I did not mean the separate property automatically becomes 100% community; it is to the extent that it is comingled. For example, if A has a house before the marriage, then pays on it during the marriage with community income, it becomes tainted to the extent of community income used to pay it off, and appreciation during the marriage. If you sell it during the marriage and put the proceeds into a joint account, the taint is 100% if comingled to the extent you cannot separate it.

Been there, done that. Well, it happend to his house. But this is why it is very important to keep inherited funds completely separate.

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