John R. Bullis: One-way street going from separate to joint tax return
October 30, 2017
Congress sure has some confusing rules. If you filed separate returns, but were married for the year(s) involved, you might consider filing and Amended Return form 1040X to change to filing a joint income tax return.
But if you filed a joint return, you can't file amended returns changing to two married filing separate returns. It's sort of a "one way" street.
Some folks worry about the joint return causing a higher total tax. Depending on your income level and your various deductions and credits, a joint return usually results in the lowest tax. I mean the total tax of the two separate returns is usually more than the joint return tax.
Since Nevada is a community property state, earned income is taxable 50 percent on one separate return and 50 percent on the other separate return. The income tax withheld is also supposed to be allocated the same way, 50 percent on each return.
Deductions paid from community property accounts also should be allocated one-half each separate return. If you were gifted something (stock, cash, etc) or inherited something, that's not community property unless you took actions to change it from separate property to community. That means if you inherited $50,000 and you put it in your joint checking account with your spouse, the separate property nature of the item is lost — it's then treated as community property.
If you have separate property and that's used to pay some Itemized Deductions (Schedule A of form 1040 such as medical expenses, property taxes, interest, etc), that probably is a deduction only for your married filing separately return.
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We haven't seen IRS make a big issue of seeing the allocation of community income being allocated as mentioned above. Maybe they're too busy, or don't feel it will be worth its time. IRS is having problems keeping experienced employees, their computers are old and they have other work to do such as caused by Obamacare. Also IRS is now sending many employees to work on the foreign bank accounts to collect tax on income that wasn't reported correctly.
Most computer programs for preparation of income tax returns have a feature that allows you to see the total tax of two separate returns versus the total tax on a joint return. You just need to be careful in listing the various items to recognize which spouse is involved. That's when it's important to realize which items of income, deductions, etc. are to be allocated 50 percent each and which are items one person has from separate property.
A client asked me if I had heard, "A person was praying to God, please let me win the lottery. God responded, it would be a favor if you would buy a ticket."
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.