Question

Capital gains married filing separately

Forum|Forum|6 years ago
November 29, 2019
4 replies
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If a married couple has one person retired (low income) and one working (high income), and has a significant long term capital gain, can the person with the lower income claim 100% of the capital gain if filing separately?

DJS

Employee

You and your spouse cannot just split your income and deductions up any way you want in order to maximize the MFS tax savings. Instead, state law determines how you must divide up your income and deductions.

If you file a federal tax return separately from your spouse and you live in a community property state, you must report half of all community income and all of your separate income. Generally, the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes. Refer to https://www.irs.gov/publications/p555#en_US_201901_publink1000168769

Nine states have community property laws. Married couples in these states typically need Form 8958 if they file separate rather than joint tax returns:

Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin

On Form 8958, a couple lists individual sources of income for each of them, such as employers, banks that pay interest, stocks that pay dividends, capital gains and tax refunds. The couple reports the total amount received from each source, then allocates a portion of the total to each person.

Form 8958 essentially reconciles the difference between what employers (and other income sources) have reported to the IRS and what the spouses will be reporting on their federal tax returns. Both spouses must include a copy of the form with their tax return.

In other states gains on assets that are jointly held can be allocated any way you like, but gains on assets held in one name only must be reported on the owner's tax return.

Answers are correct to the best of my ability but do not constitute legal or tax advice.**If this post is helpful please click on "thumbs up"**

Critter

Employee

Most times trying to play the MFJ vs MFS game you will lose and end up paying more not less in taxes ... BEFORE you file anything compare both options carefully then choose the best option for you both combined not separately ...

Married Filing Jointly is usually better, even if one spouse had little or no income. When you file a joint return, you and your spouse will get the married filing jointly standard deduction of $24,000 (+$1300 for each spouse 65 or older) You are eligible for more credits including education credits, earned income credit, child and dependent care credit, and a larger income limit to receive the child tax credit.

If you choose to file married filing separately, both spouses have to file the same way—either you both itemize or you both use standard deduction. Your tax rate will be higher than on a joint return. Some of the special rules for filing separately include: you cannot get earned income credit, education credits, adoption credits, or deductions for student loan interest. A higher percent of your Social Security benefits may be taxable. Your limit for SALT (state and local taxes and sales tax) will be only $5000 per spouse. In many cases you will not be able to take the child and dependent care credit. The amount you can contribute to a retirement account will be affected. If you live in a community property state, you will be required to provide additional information regarding your spouse’s income. ( Community property states: AZ, CA, ID, LA, NV, NM, TX, WA, WI) If you are using online TurboTax to prepare your returns, you will need to prepare two separate returns and pay twice.

https://ttlc.intuit.com/questions/1894449-married-filing-jointly-vs-married-filing-separately

https://ttlc.intuit.com/questions/1901162-married-filing-separately-in-community-property-states

https://ttlc.intuit.com/questions/1894449-is-it-better-for-a-married-couple-to-file-jointly-or-separ...

N

NCPERSON1

because of all the issues stated previously in this thread, married couples file joint 96% of the time. It has to be a 'strange situation' (e.g. one spouse refuses to sign the tax return) that causes a married couple not to file "joint"

J

jerryrw

If a married couple has a large capital can we split it filing separately or put it in the lower income individual tax form.

N

NCPERSON1

you may find the tax liability is higher filing separate; the lower income spouse will hit the 15% and 20% capital gains tax bracket much quicker. Also, you may find the value of the itemized deductions to be worth much less (both of you must either itemize or take standard deduction - you can't mix and match).

who owned the assets that were sold?

R

RonnyWrong

Hi, I am looking for an answer to jerryrw's question. We have a unique situation. We are still technically married but separated long enough to qualify as unmarried according to IRS rules, we lived apart and I pay maintenance. My ex-spouse can file as head of household and I can file as single or possibly HOH (nevermind that last part). I ran the taxes many ways. We have capital gains from a joint account that are significant, since I make more I pay 15% on the capital gains, my ex-spouse makes less and qualifies for 0% tax on capital gains. We would like to put all of the capital gains in her return, we live in Illinois, not a community property law state. Is this permissible, to all the capital gains from a joint account to the person that has a lower tax rate?

A

abbie12

how do you handle capital gains on jointly held property when filing separately?

DJS

Employee

You and your spouse cannot just split your income and deductions up any way you want in order to maximize the MFS tax savings. Instead, state law determines how you must divide up your income and deductions.

If you file a federal tax return separately from your spouse and you live in a community property state, you must report half of all community income and all of your separate income. Generally, the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes. Refer to https://www.irs.gov/publications/p555#en_US_201901_publink1000168769

Nine states have community property laws. Married couples in these states typically need Form 8958 if they file separate rather than joint tax returns:

Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin

On Form 8958, a couple lists individual sources of income for each of them, such as employers, banks that pay interest, stocks that pay dividends, capital gains and tax refunds. The couple reports the total amount received from each source, then allocates a portion of the total to each person.

Form 8958 essentially reconciles the difference between what employers (and other income sources) have reported to the IRS and what the spouses will be reporting on their federal tax returns. Both spouses must include a copy of the form with their tax return.

In other states gains on assets that are jointly held can be allocated any way you like, but gains on assets held in one name only must be reported on the owner's tax return. You may allocate joint gains based in these states based on the proportions of income, or any other reasonable method.

Answers are correct to the best of my ability but do not constitute legal or tax advice.

Answers are correct to the best of my ability but do not constitute legal or tax advice.**If this post is helpful please click on "thumbs up"**

J

jackson1143

Can one spouse file for capital gains if both parties received a 1099 for sale of a property ?

DJS

Employee

Can you explain the circumstances? Was this for the sale of a house or other real estate? Are you filing married but filing separately?

If the assets that were sold were owned jointly (held in a joint account) you can allocate the capital gains any way you would like. If the assets sold were owned (the account titled in only one name) then that spouse must claim the gain or loss.

Answers are correct to the best of my ability but do not constitute legal or tax advice.**If this post is helpful please click on "thumbs up"**