My wife received a notice from the IRS indicating they contest the amount specified on line 64 ("Federal income tax withheld from Forms W-2 and 1099") of her 1040. I'm trying to determine if we need to split the community adjustment out to a separate line.

We live in a community property state and file separately. We both submitted form 8958 ("Allocation of Tax Amounts Between Certain Individuals in Community Property States") with our 1040s to indicate the split of income and withholdings between the two of us.

We both filed via Turbotax, and Turbotax calculated our withholding (1040 line 64) as the adjusted withholding after accounting for community property split. In other words:

  • her W-2 indicates that she had X withheld
  • my W-2 indicates I had Y withheld
  • her 1040 line 64 indicates (X + Y)/2
  • my 1040 line 64 indicates (X + Y)/2

I have a feeling the IRS contests this because turbotax should have included her original withholdings (X) on line 64, and then shown the adjustment ((X + Y)/2 - X) per form 8958 on line 73 ("Credits from form: (d) other"). However, I cannot find any published guideline on how/where to include the adjustments from the 8958 on one's 1040. Neither the instructions for that form nor Publication 555 indicate which 1040 lines should reflect the income and withholding adjustments, or if they should be considered as part of the baseline earnings and withholding.

Strangely, turbotax did split the original income and community property adjustments on our 1040s across lines 7 ("Wages, salaries, tips, etc.") and 21 ("Other income"), respectively, but produced a post-adjustment value for withholdings.

Is there guidance on how to account for community propery withholdings properly on the 1040? This is for the 2015 tax year.

Thanks!

  • I think the form just wants you to enter how much was actually withheld. How that number was set is really not relevant, only how much you have already paid and how much you owe. – keshlam Oct 1 '16 at 23:52
  • If that's the case, then we've filled out the form correctly :(. Today, we received a follow-up letter from the IRS stating (unhelpfully): "We did notice the total payments; on line 74 of your 1040 tax return you reported (X + Y)/2 and the correct amount should be X." I still can't figure out where we are meant to show the community property adjustment. – mypetyak Oct 4 '16 at 3:03
  • Interesting question. The instructions for form 8958 aren't as clear as they could be, but the answer seems to be that if you are filing separately you are supposed to include this form with both returns to document how you have combined these values and then redistributed them across the two forms. The recombined numbers would be the ones you copy into the actual 1940's -- first column is the sum, second column is what goes into the first return, third column is what goes into the second return. But please don't take my word for it; this is the first time I've seen this form. – keshlam Oct 4 '16 at 3:16
  • This is exactly what we (turbotax) did - we calculated the totals, and split them evenly for income and withholdings. We submitted the 8958 with our original tax returns, and submitted it again (along with copies of my relevant tax forms, and a description to point out the community property laws we used in our calculations) when the IRS sent a vague notice requesting additional documentation. I think it's relatively rare for the IRS to see returns filed separately in community property states, but I cannot figure out what the misunderstanding is (or how to remedy it). – mypetyak Oct 4 '16 at 4:30
  • I should add, however, that the 8958 does not show even splits between column B and C. As I read it, these columns should show the proportion of who actually earned/paid the income or withholding for each line. Should this form actually reflect the even split instead? I'm confused by the word "allocation" here, as to whether that means "who earned which share of it" or "how you want to split it up after community property assignment". – mypetyak Oct 4 '16 at 4:37

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