Unemployment in Community Property State

If I get any more updates telling me the rules are now different my head is going to explode!

For those doing returns in a community property state, Spidell just sent out a newsflash saying a MFJ return in a community property state can reduce unemployment by 20,400 if under the 150k AGI cutoff without filing MFS.

Of course our recently updated software is not processing this correctly.

Glad I put the all those on extension!

I am ready to retire.

I doubt my software, Lacerte, is going to even try to determine if the UI income for 1 spouse is community property. So what do we do? I guess we enter half of the UI as being paid to the taxpayer and half as being paid to the spouse.

Spidell did not put any sort of disclaimer on that news flash. They didn't say, lets wait for IRS guidance. So... who is going to start doing this now?? It sure feels like we should wait for more guidance. This year sucks eggs!!

Lol! I agree Wiles!

from the IRS:

Note. If your modified adjusted income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid to you in 2020. For married taxpayers, you and your spouse can each exclude up to $10,200 of unemployment compensation. For example, you file jointly with your spouse and your modified AGI is less than $150,000. You were paid $20,000 of unemployment compensation and your spouse was paid $5,000. Report the $25,000 (the total amount of your unemployment compensation) on line 7 and report $15,200 on line 8 as a negative amount (in parentheses). The $15,200 excluded from income is all of the $5,000 unemployment compensation paid to your spouse, plus $10,200 of the $20,000 paid to you.

https://www.irs.gov/forms-pubs/new-exclusion-of-up-to-10200-of-unemployment-compensation

Lacerte is processing it like this, as of yesterday.

Easy call for most of them= extension time. Except. How come there is always an "except" these days?

Except if we need to get the 2020 return filed by sometime this summer (do we know the drop dead date for that yet?) in order to get the third round of stimulus that they will not qualify for because we know their income will be too high in 2021.

Spidell is wrong. To get the exclusion, the spouse must have “received” the UI. This is the word used in the statute. UI is community income, and it must be reported 50/50 by each spouse because each spouse has a vested interest in the income. But strictly speaking, if Spouse A receives UI and Spouse B doesn’t, Spouse B doesn’t get an exclusion for his or her half.

So Dave, you are saying that even if we file MFS, if only one spouse gets the unemployment only $10,200 can be excluded?

Even in a community property state where everything is split? I'm finding nothing in Nevada to suggest that UC isn't split 50/50.
So MFS = 50/50. regardless of who made what.

dave829 is correct as far as I can see. I read the statute the same way.

See revenue ruling 55-246.

From Spidell:

Lynn Freer
Participant
We believe it is community property as income received during the marriage is generally community income and it was not a gift or inheritance or something they brought into the marriage.

Seems like we will need to wait to see how IRS interprets it. Really appreciate you "code warriors" checking in on this. Greatly appreciated!

So Dave, you are saying that even if we file MFS, if only one spouse gets the unemployment only $10,200 can be excluded?

Yes.

Even in a community property state where everything is split?

Yes.

See revenue ruling 55-246.

Not sure I understand the relevance. The ruling deals with section 911, which has been amended since the ruling was issued, and now contains a specific rule for community income --- 911(b)(2)(C).

Husband rec'd $20,000 in unemployment
Wife rec'd $10,000 in unemployment

Husband gets to exclude $10,200 of his $20,000
Wife gets to exclude $10,000 of her $10,000

Taxable UC = $9,800 ($30,000 - 10,200 - 10,000)

Husband's share = $4,900
Wife's share = $4,900

Correct?

Correct, that's the way I'm interpreting it.

But MFS in a community state would still serve to bring income down below the 150 threshold. Just only one spouse gets the 10,200?

Depends on your facts. Let's take Coles Law's facts. Husband received $20,000 in unemployment compensation, wife received $10,000 in unemployment compensation, community property state.

I'm going to add the fact that AGI on their joint return is $170,000. Since AGI is $150,000 or more, they get no exclusion. So, they file MFS and each report AGI of $75,000. Husband gets $10,200 exclusion, wife gets $10,000 exclusion. If AGI on the joint return was $140,000, they would get the same $10,200 and $10,000 exclusions as if they filed MFS.

But since some tax benefits are allowed only on a joint return, you have to figure the returns both MFJ and MFS to see which filing status results in the lowest tax.

Also make sure you are charging enough for MFS returns. We have had many problems getting the MFS returns processed properly by the IRS. Still have two from last year that are sitting on an IRS desk somewhere.

Several years ago we contacted the IRS systematic problem resolution office to report the problem. I was surprised when they called me back, looked into it, and then called again to say they would fix it.

Well the fix did not happen. We called again a few months ago and again received a call back. Said they were going to propose an IRS computer software fix. I will believe it when I see it. Apparently the IRS software is not set up to process form 8958 properly.

One poster suggested attaching PDF's of the W-2's and we are trying that this year. We will see what happens.

And just read on another board of an issue I had not considered. Medicare premiums can go up faster when MFS. Luckily most of my clients collecting unemployment are not collecting social security but it was really not on my radar.