Discussion:Married couple, live in different states, how to file

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Discussion Forum Index --> Tax Questions --> Married couple, live in different states, how to file


Cindola1 (talk|edits) said:

February 19, 2007
Married couple with 2 kids. Wife & kids live in CA, husband moves to NV & establishes true permenent residency there for all of 2006. How to file? Can they do Joint for Federal, Separate for CA? If they can do MFS for CA, then the wife gets 1/2 of all community property income and deductions, correct? Thanks in advance for input.

JR1 (talk|edits) said:

February 19, 2007
Joint returns everywhere actually, but you'll allocate income and deducts between the states on the state filings.

TaxManager (talk|edits) said:

19 February 2007
I had a client like that. We would file a joing federal and seperate states. I believe you have to do it that way.

Cindola1 (talk|edits) said:

February 19, 2007
TM, when you say separate states, you are meaning MFS for State of CA, correct?

TaxManager (talk|edits) said:

19 February 2007
Yes married filing seperate for each of the states.

JR1 (talk|edits) said:

February 19, 2007
What's the advantage you folks see in filing separately in each state? I assume that filing separately is a way to legally not be liable for the other's income and expenses, which is probably not the case, and may have some penalties for not filing jointly. By filing jointly, you're going to split the incomes up and end up with the lowest tax aren't you? I don't do much with CA tho', so maybe that's driving your answers...

TaxManager (talk|edits) said:

19 February 2007
I think the issue lies in having one as a resident and one not a resident. NY has a resident tax return, nonresident returns, part year resident returns but not a full year resident non resident return

Glmpllc (talk|edits) said:

19 February 2007
...sometimes the reason you do so is for non income tax purposes...for example, to perfect claims to homestead exemptions from real property taxes...

Riley2 (talk|edits) said:

19 February 2007
California will allow a separate return if the nonresident spouse has no California source income. This scenario is unlikley if the resident spouse is domiciled in a community property state.

Cindola1 (talk|edits) said:

February 19, 2007
Yes Riley. After reviewing the CA FTB's publications, we must file the same status as the Federal return, since the spouse's income will be 1/2 of his. Thanks everyone.

KatieJ (talk|edits) said:

19 February 2007
Cindola1, I doubt that California will consider the husband a nonresident of California if his wife and children remain here, unless the couple are separated (i.e., not living as a married couple). If that is the case, then under California law the earnings and accumulations of each spouse are his or her separate income. If the husband is truly a nonresident of California (i.e., absent from the state for a purpose that is not temporary or transitory -- e.g., he doesn't come back to California to visit his family, stay in the family home, etc.), for the entire year, he has no California source income arising from his estranged wife's California employment, which is her separate income. Similarly, she has no community interest in his Nevada earnings. As a result, she CAN file a separate return regardless of the California filing (assuming the nonresident husband has no other California source income) See Calif. Family Code Sec. 771.

Whether the husband is really a nonresident of California, and whether the couple is really "living separate and apart," are questions that must be resolved with reference to all of the facts and circumstances. There is not enough information here even to speculate about that.

KatieJ (talk|edits) said:

19 February 2007
Oops, sorry, I meant "regardless of the FEDERAL filing" in the last sentence of the first paragraph above.

Riley2 (talk|edits) said:

19 February 2007
KatieJ, I think you meant to say that, under California law, merely residing in a separate household will not destroy the community property nature of earned income unless the couple separated with the intention of ending the marriage. If the husband moved out of the house and filed for divorce on the same day, then I think that we can safely assume that the community has been terminated. However, I agree with you that we have no indication that this couple intends to end the marriage.

Cindola1 (talk|edits) said:

February 19, 2007
The couple has not and is not ending their marriage. All income & expenses are and will be allocated 1/2 to each as community property.

KatieJ (talk|edits) said:

19 February 2007
Actually, Riley, the statute just says current earnings and accumulations are separate income if the spouses are "living separate and apart." The meaning of that phrase has been interpreted by the California courts, though, to mean "with no intention of resuming the marital relationship." So, you are right, just living in a separate household (e.g., for employment reasons) doesn't change the character of the income. However, it isn't necessary for the couple to be divorced or involved in legal proceedings. All that is necessary is that they separate with no intention of getting back together. I think I remember a case where they changed their minds and got back together later, and the income was still held to be separate. It's the intent at the time that matters.

If this couple is not ending their marriage, then a question arises as to the actual residence status of the husband. If his wife and children remain in California, his domicile probably remains in California (if so, it is California community property law, not Nevada law, that governs the division of his income -- not that it makes a difference since both are community property states). In that case, he is a nonresident only if he is absent from the state for a purpose that is not temporary or transitory (Cal. Rev. & Tax. Code Sec. 17014). However, if he is absent from the state on an employment-related contract for an uninterrupted period of at least 18 months (during which he is not present in California for more than 45 days, in the aggregate, in a taxable year), he would be deemed to be a nonresident pursuant to CRTC Sec. 17014(d).

If he does not qualify for this "safe harbor," his residence status must be determined with regard to all of the facts and circumstances.

Riley2 (talk|edits) said:

20 February 2007
Yes, I agree with what you are saying. I also agree that California community property law would apply to the earnings of any spouse who is domiciled in California, regardless of his residency status for tax purposes.

Wiles (talk|edits) said:

13 August 2009
Dumb question: Is pension and annuity income considered community property income that must be split between the nonresident spouse and the resident spouse? Assuming retirement money was earned and invested and accumulated entirely during marriage and California residents for entire marriage.

Husband moved to NV and is drawing retirement. Wife still in CA. Will join him later this year or next, once she retires.

NoProfile (talk|edits) said:

14 August 2009
Depends on whether the plan is covered under ERISA. At least one court ruled that ERISA pre-empts community property laws.

Wiles (talk|edits) said:

17 August 2009
If non-ERISA then it is community property. If it is ERISA, then it is not so clear. Is this right?

KatieJ (talk|edits) said:

18 August 2009
NoProfile (why not?? <G>) may be referring to the U.S. Supreme Court's 1997 decision in Boggs v. Boggs, which is available here: http://supct.law.cornell.edu/supct/html/96-79.ZO.html.

The issue in Boggs was whether the plan participant's wife, who predeceased the participant, had the power to bequeath her community property interest in the plan. Isaac and Dorothy Boggs were married from the time he began working for South Central Bell in 1949 until her death in 1979. They were domiciled in Louisiana, a community property state, during their entire marriage. After Dorothy's death Isaac married Sandra. Isaac retired from Bell South in 1985 and died in 1989. Dorothy's will left 1/3 of her estate to Isaac and 2/3 to their two sons, subject to a lifetime usufruct (life estate) for Isaac. After Isaac's death, the sons claimed a right to 2/3 of their mother's community interest in Isaac's undistributed retirement benefits. ERISA, however, provides that all of a plan participant's undistributed benefits under a joint and survivor annuity pass to the surviving spouse, which in this case was Sandra. There was no question that under Louisiana law, Isaac's retirement benefits were community property of Isaac and Dorothy. However, the Supreme Court ruled that the ERISA rule pre-empted the state law to the extent it was inconsistent.

I do not believe this decision has anything to do with the character of the income from a retirement plan (whether covered by ERISA or not) during the marriage while both spouses are living. It is community income under state law and the only limitation Boggs puts on that is that the nonparticipant spouse who predeceases the participant cannot bequeath his or her community interest in a joint and survivor annuity covered by ERISA if the participant is married to someone else at the date of his or her death. The ERISA rule that the benefits must be paid to the surviving spouse prevails. This does NOT mean that the plan was not community property or that the nonparticipant spouse did not have a community interest in it. She did; she just didn't have the power to bequeath that interest to anyone else.

Long story short: during the marriage, under California law, the retirement income is community income and half of it is taxable income to the resident spouse. ERISA has nothing to do with this. The nonresident spouse's share cannot be taxed by California, though, even if the participant performed 100% of the services to earn the pension in California, because of federal statutory law (4 USC § 114), which prohibits states from taxing nonresidents on retirement income on a source basis.

KatieJ (talk|edits) said:

18 August 2009
P.S. Here's a link to an interesting article about the Boggs decision. I can't tell who wrote it and don't know how authoritative it is, but there are a lot of citations that could be followed up if anyone really cared. http://www.trustsandestates.net/EPQPIRA/Html/IceQPs03NPS.htm

Note that the author starts out with a blanket (and unsupported, alas) statement: "It is clear that the nonparticipant spouse has a community property interest in the participant's qualified plan and IRA benefits, to the extent earned during marriage."

Riley2 (talk|edits) said:

18 August 2009
I believe that NoProfile was referring to the Karem decsion wherein the Tax Court ruled that the distributee (usually the participant) is taxed on a distribution from a qualified plan, regardless of community property laws. This is due to the anti-alienation principle contained in both ERISA and Internal Revenue Code § 401(a)(13)(A). The Karem Court held that anti-alienation rules and Internal Revenue Code § 402(a)(1) basically pre-empt CP rules for distributions from any qualified pension plan.

In ERISA/Qualified plans, the participant is taxable on any distributions received from the plan unless the distribution is made pursuant to a QDRO (even though the retirement account is community property). Karem v. Commissioner. Note that Karem involved the taxation of a LSD distribution to which CP rules specifically do not apply. However, the Court held that the same result would be found for non LSD distributions.

Similarly, distributions from an IRA are taxed to the distributee, regardless of community property laws. Internal Revenue Code § 408(g). This would be true even though the funds used to fund the IRA were community property.

KatieJ (talk|edits) said:

18 August 2009
If I were here every day, no doubt I would learn something new from Riley every day <G>.

Wiles (talk|edits) said:

19 August 2009
Riley, I assume you are addressing NoProfile's post with respect to Federal law and not addressing my 8/13/09 post with respect to California law.

I reviewed FTB Pub 1031 which suggests that the pension income is community property and is split between the resident spouse and the non-resident spouse.

Riley2 (talk|edits) said:

20 August 2009
Since California has adopted Subchapter D and all amendments to Subchapter D, distributions from qualified plans and IRA's are taxed to the distributee (not necessarily the owner of the account) under Federal and California law.

Thus, what I am saying is that the account itself may be community property, but that does not negate the fact that the distributee bears the tax burden on the distribution made from a community property qualified plan.

I don't expect California to change Publication 1031 to reflect current case law.

adding search term: when community ends

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