Community Property IRS FAQ Update - Unemployment - Spidell

Community Property IRS FAQ Update – Unemployment

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Message Board Community Property IRS FAQ Update – Unemployment

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    • #301255
      Anonymous
      Participant

      Q4. I’m married and don’t file a joint return with my spouse. We live in a community property state. Are we eligible for the exclusion? (added April 29, 2021)

      A4. Yes. Because you live in a community property state, you report half of your unemployment compensation and half of your spouse’s unemployment compensation on your tax return and your spouse reports the other half of your unemployment compensation and half of his or her unemployment compensation on his or her tax return. You should exclude up to $10,200 on your tax return if your modified AGI is less than $150,000. Your spouse should exclude up to another $10,200 on his or her tax return if your spouse’s modified AGI is less than $150,000. Neither of you should exclude more than the amount of unemployment compensation you report on your Schedule 1, Line 7.

      https://www.irs.gov/newsroom/2020-unemployment-compensation-exclusion-faqs-topic-a-eligibility

       

    • #301308
      Sandy Weiner
      Participant

      Thank you!!   We will send out a flash shortly.

      • #301897
        Anonymous

        Spidell, will you be sending out a flash soon?  You indicated you would a few days ago…have not yet seen anything.  Thanks!

    • #301314
      Ian Alper
      Participant

      Awesome.  Thanks for the update.  Did not expect any guidance so soon.

       

      So now we are just left to speculate about if the double deduction can be taken on a MFJ return in a community property state.

       

       

      • #301358
        Jim Barrick
        Participant

        This is exactly the scenario that I’m waiting for specific guidance on!! That extra $10,200 exclusion for a MFJ in the 22% tax bracket pays my fee.

        • #301371
          Carol Keane
          Participant

          Jim Barrick  -on a MFJ return where only one spouse paid the UI benefits, and the other got none, how are you going to label the extra $10,200 exclusion on Sch 1 , line 8?   and are you going to show one exclusion amount at $10,200 and the other one as the difference up to the total they received in UI not to exceed $20,400.  OR will you take the total they received divided by 2 – and show two exclusions equal to half the total UI they got?

           

          • #301378
            Anonymous

            Hmm – also would like to know about MFJ double deduction. Or is it required that we split the return into two (MFS) to take advantage of this double deduction?

    • #301316
      Sandy Weiner
      Participant

      I would think the same reasoning would apply.

    • #301321
      Anonymous

      Here’s hoping. But should we wait for additional guidance before trying to take that position?

    • #301325
      Harlan Levinson
      Participant

      I do not think this example really is applicable to where ONE spouse gets UI and the other does not. I am not saying   that the method Spidell is proposing is incorrect, just that this example is not the same as where only ONE spouse gets UI

    • #301330
      Warren Taryle
      Participant

      Mostly commenting here to follow this. But my two cents a married couple in a community property state should be able exclude up to $20,400 of UI regardless of who received it but I can’t remember the last time the IRS took advice from me.

      • #301332
        Daniel Hutnicki
        Participant

        I was going to ask this until I saw your post.

        So in a community property state, one spouse makes 20,400 in unemployment and they file separately. They would divide the income, each getting 10,200  and each would get a 10,200 excursion leaving you with no taxable income. However, if you file jointly, you only get one 10,200 exclusion, leaving you with 10,200 in taxable income.  Did I state this correctly?  Makes no sense to me.   It should be like capital losses, where you each get a 1500 maximum loss so each spouse should get a 5100 exclusion  or a married couple should get a 20,400 exclusion

    • #301381
      Anonymous

      I have several clients in my office in the same situation. We are going to extend as MFJ to wait for more guidance. Anyone see any issue with this extension strategy – MFJ or should we file the extension as MFS?

    • #301382
      Anonymous

      Another question.  Do we obligate to notify the client about this if their tax returns are already filed?  Some of the clients’ savings are will be less than the extra fee we will be charging.

      Still unclear about the MFJ.  Can we still claim the deduction for both taxpayers even if only one spouse received the unemployment income when filing MFJ?

       

    • #301580
      Anonymous

      Did we finally resolve MFJ with one spouse receiving unemployment for a community property state (California)? The IRS FAQ does not address a community property state as an example. Q1 addresses a MFJ situation in the 4th paragraph that clearly states that each would have to have their own unemployment compensation (no mention of community property).

    • #301594
      Kristen Jones
      Participant

      My two cents… IRS seems to confirm Spidell’s position that on a MFS return, in a community property state, the C.P. Split would take all UI (say $20,400 for ONE spouse), put half on each return, and each spouse would get to exclude $10,200 up to the total received.

      However, in the statement below copied from the IRS’s FAQ page, I still interpret this to be, each spouse can only exclude up to $10,200 of THEIR OWN UI on the joint return.  I think we are still missing the statement from the IRS that a MFJ return, in a community property state, can exclude a flat $20,400 of all UI payments.

      “If you’re married, the exclusion can apply to you and a separate exclusion can apply to your spouse. If you and your spouse file a joint return and your joint modified AGI is less than $150,000, you should exclude up to $10,200 of your unemployment compensation and up to $10,200 of your spouse’s unemployment compensation.”

    • #301631
      Janet Stotler
      Participant

      I disagree. MFJ gets up to $20,400 if you extrapolate from the FAQ.

      The FAQ doesn’t require that both get UCE. They are just trying to make clear that if you are MFS and in a community property state your income gets split in two and and the split on either return gets a full up to $10,200 per return exclusion that is not limited by anything except the combined $ amount. Not who got how much. Example $16,000 + $8,000 = $24,000. $12,000 on each return. They each get $10,200 even though one had less than that. If only one had UCE of $24,000 it’s still $12,000 on each return and they still each get $10,200 exclusion. Nothing in FAQ 4 says you have to figure out how much exclusion you get on your part of the half of the community income and how much exclusion you get on your spouses part of the half of the community income. Nope. Add it altogether and you get up to $10,200 on each return. No ifs, ands, buts  or special calculations.

      Extrapolating to MFJ, if they can get up to $10,200 on two returns, they can get up to $20,400 on a MFJ return. I filed mine by entering in 2 1099-G’s for half the amount each. My SW was not happy when I marked “joint” even though it made the calculation correctly. So, I bifurcated to bypass efile issues and marked 1 TP and the other spouse.

      You have to remember that the original FAQ’s were not taking into consideration that fact that 9 states are community. That’s why they had the clarification in #4.

       

       

    • #301797
      Kristen Jones
      Participant

      Hi Janet,  I thought about that as well.  And “generally” speaking I do agree that the IRS generally errs on the side of “if they can get XX on 2 MFS returns, they should be able to get the same XX on a MFJ return.”

      My other thought on this though was the income matching.  Do you think that the IRS will flag the “missing” unemployment income that you allocated to the spouse who didn’t get UI?  Or do you think they will just look at the UI in WHOLE as reported on the return disregarding which spouse it is allocated to?

      I am just wary of their use of the word “separate exclusion” related to a MFJ return.  I guess that would be the proper generic description without regard to community property states. Hmmmmm…. :/

    • #301804
      Janet Stotler
      Participant

      Yes but remember those words are not in the context of a community property state. FAQ 1 did not take that into consideration. If you look at FAQ 1 carefully*, MFS would only put the unemployment that came in their name  on their own return and their exclusion on their return would thus be only based on their own unemployment. That was blown out of the water by FAQ 4 because IRS forgot to address the issue of community property. Per usual. This means it wasn’t addressed for MFJ either in FAQ 1.

      <span style=”color: #0000ff;”>*If you file Form 1040-NR or file Form 1040 or 1040-SR separately from your spouse, you generally don’t report your spouse’s unemployment compensation on your tax return. You can’t exclude any of your spouse’s unemployment compensation that’s not reported on your tax return, even if you claim your spouse as a dependent. You’re eligible to exclude only up to $10,200 of the unemployment compensation you received in 2020.</span>

    • #301812
      Carol Keane
      Participant

      Janet – what if you put it all in on one 1099G and keep the software happy and let it do the exclusion for $10,200 and then add your own separate adjustment on Sch 1 , line 8 as a negative 10,200 labeled UCE-Spouse (Community Property State) on a MFJ return?

       

       

      • #301814
        Janet Stotler
        Participant

        Carol

        I could try that. I have one I am just waiting for the 8879 for that I split up I can try it your way. I have already filed one with a split. The way I see it, either way may generate a notice that will need to be responded to.

    • #301815
      Carol Keane
      Participant

      Janet

      I haven’t seen Spidell ( Lynn Freer) making a suggestion if / how we can handle this on a MFJ return , have you?    I am still a little leery if the IRS FAQ really allows us to take the full $20,400 on a MFJ return when only one spouse got paid the UI benefits.  For sure, we can on MFS – but i would much prefer to do it on a MFJ return.

       

    • #301816
      Janet Stotler
      Participant

      Not here she hasn’t because she already did. Not the mechanics but the theory. See her 3/26/21 article under hot news and notes. See below for relevant excerpt.

      UI exclusion for married taxpayers, and PPP loan and IRA extensions

      <header class=”entry-header”>
      <div class=”entry-meta row”>
      <div class=”col-12 col-md-12″>March 26, 2021</div>
      </div>
      </header>

      <hr />

      <div class=”entry-content”>

      If a married couple’s combined AGI (calculated without any UI compensation) is below $150,000, then MFJ taxpayers may exclude up to $20,400 of unemployment income even if one of the spouses had less than $10,200 in UI and the other spouse had more than $10,200. That is because California is a community property state and the Tax Court has recognized that UI is treated as community property. (Calhoun v. Commissioner (1992) 64 TC 222) However, your tax software may not properly split this income, and could improperly limit the exclusion if one spouse received less than $10,200. Tax professionals need to watch out for this and apply a manual override in this situation.

      </div>

    • #301817
      Kristen Jones
      Participant

      Hallelujah!!  I had NOT seen that! Thank you very much Janet.

    • #301821
      Carol Keane
      Participant

      Janet , I had seen that earlier but that was before the controversy began if we could rely on Calhoun or if based  Renoir( sp?) .  (the  case that had to do with not allowing foreign tax exclusion ) that we could not take the position on of excluding $20,400 on a MFJ return.  After Spidells posted that on March 26 they recommended we file MFS extensions and wait for guidance.   I was hoping now that IRS FAQ came out that Spidell would chime in and say they think we are all good on a MFJ return now.   To me the IRS FAQ for sure clears it up for MFS, I am just not 100% convinced it does for MFJ ( especially when we need to tweak the software to get our desired result.)

    • #301823
      Janet Stotler
      Participant

      Carol,

       

      If we couldn’t rely on that, the IRS would not be allowing a split on MFS returns where the total UC is divided in half and placed on each spouse’s return. I too was waiting for guidance from the IRS and FAQ 4 did it for me.

      I rest my case.

    • #301824
      Ian Alper
      Participant

      I think you guys are being pretty aggressive and taking a needless risk/potential headache.

      As several have pointed out, FAQ’s cannot be relied upon and can be changed.  Several well respected tax experts do not agree that this treatment is acceptable.  Not trying to be critical just helpful.

       

      In our office we are just putting them all on extension and hoping for clearer guidance.

    • #301828
      Kristen Jones
      Participant

      I don’t think it’s that aggressive.  The IRS can not force taxpayers to file MFS just to get that benefit in a Comm. Prop. state.  That would negatively affect the taxpayer in too many other areas.  MFJ, $150k AGI ~22% bracket max… $10,200 x 22% = $2,244 max savings.  You can’t get what you don’t ask for.

      I plan to advise my clients on the position I’m taking and let them make the call.  I have too many returns on extension already because of CA PPP treatment! 😛

    • #301831
      Ian Alper
      Participant

      I hear you about hating to put more “in the box”  so many extensions this year!

      I agree that they cannot make you file MFS to get the deduction- just not sure their advice on the FAQ will hold up/last.

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