IRS Form 8958 - community income splitting
Nov 27, 2012 – IRS provides draft Form 8958 [ http://www.irs.gov/pub/irs-dft/f8958--dft.pdf], “Allocation of Tax Amounts Between Certain Individuals in Community Property States”
About the Topic
According to the title of Form 8958, it is to be used by those subject to state community income splitting rules. Income splitting has always applied to opposite-sex married couples who file separately (MFS) instead of jointly (MFJ) and who are domiciled in a community property state — roughly speaking, eight western and southern states (plus Wisconsin), most of those once subject to Spanish influence with its marital community property traditions. California and Texas are the two most populous community property states.
More recently, since 2010 tax year, the IRS has issued an advisory extending the splitting rules to unions in community property states which are permitted at the state level even if prohibited by DOMA (Defense Of Marriage Act) at the federal level. These unions include Same-Sex Married Couples (SSMC) and Registered Domestic Partners (RDP). In effect, the IRS is doing a delicate dance by saying “You can’t file as married on your federal return, but we want you to follow all the same splitting rules as if you were filing MFS”. For some couples, applying the splitting rules results in a shared tax benefit, while others see a tax increase when total tax is calculated on the marriage or partnership.
As a practical matter, there has never been a standard way to report the splitting on federal income tax returns (and many state returns, which use the federal totals as the starting point). For this reason, MFS and more recently, RDP/SSMC returns often cannot be e-filed (despite immense IRS pressure to e-file everything) and a variety of home-grown spreadsheets have circulated in the tax professional community to provide supporting information to the IRS about how the income and deductions and payments were split. Unfortunately, not all professionals agree on how to report the split — whether to allocate line-by-line on the tax return, or to aggregate the adjustments on a single catch-all line on the return.
With the new Form 8958, at last the IRS is providing a standard way to show the splitting allocations, with both taxpayers involved clearly identified. This should enable e-filing of many more of these returns than previously, and when fully implemented by tax software providers, will assist all preparers to consistently and fully comply with tax return reporting requirements. Because the issue of same-sex marriages is highly political at this time, it is not certain that the IRS approach to income splitting in these situations will ultimately prevail, but at least there is now a distinct line in the sand that all can recognize.
Note: I have not seen the draft instructions for the form, those will shed more light on the details as to how the final allocations are reported on the return.
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