Spouses who are married but living in different states must consider the implications of both federal and state options for filing taxes. A spouse may have to file and pay taxes even if he did not physically live in that state, and each state has its own individual filing rules. Thus, the spouses should determine the spousal tax-filing rules in both states together with federal law. Spouses can then tailor the strategy, which provides the least tax burden.
Determine U.S. federal tax-filing requirements and the less expensive filing status. Not all residents must pay taxes, but most do. Consult the IRS 1040 Instructions to determine individual reporting requirements.
Decide whether the spouses should file as "married filing jointly" or "married filing separately." Spouses who file jointly use only one return, while those filing separately fill out two returns for their respective incomes.
Determine how much income each spouse earned in both states. Consult the tax publications in the individual states for those rules, as each state has its own rules. For example, the husband may have lived in California for three months and then moved to Rhode Island for the remaining nine months of the year. In that case, the husband will have to file tax returns in both states.
Determine the separate tax-filing requirements for both states. The IRS has a "Government Sites" list where taxpayers can check for the states pertaining to their situation. This includes determining whether either or both spouses reside in a community property state. According to "IRS Publication 555, Community Property," the community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Spouses in these states split their income as if each spouse earned half. However, Publication 555 instructs spouses living in a different state to consult the laws of each state for community-property status.
Determine if either state provides tax credits for taxes paid in the different state where the other spouse is living. While spouses must file a tax return for each state in which they earn income, states generally give a credit where one spouse has to pay taxes based on work or community property in the different state. For example, the official Virginia tax site section "Credit for Tax Paid to Another State" lists the available tax credits for taxes paid in other states. Spouses should do this to avoid double taxation on the same income.
Fill out and submit corresponding federal and state tax forms. For some filers, additional "Schedule" forms may apply.
- Some states may charge the spouse not living in the community property state with that spouse's half of the community property--from the other spouse's income--from the other state. To be on the safe side, report all income and just seek a tax credit to avoid double taxation.
- Compute the numbers for both "married filing jointly" and "married filing separately." Although the joint return is best in most cases, spouses may actually owe less when filing separately.
- If spouses live in a community property state and married within the current tax year, divide the assets before and after marriage to determine how much income is subject to community property rules.
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