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I am an RDP in a community property state (WA. Do I split the Self-Employed 401K deduction(Form 1040, Line 28)50/50 with my RDP, in conjunction with splitting the Schedule C net profit? I know the SE tax question is still unanswered, but knowing the 401k answer would help for my 2011 ES tax payment computation. Yes, I know I am the only one who can contribute to the 401K, but I can’t find anything on whether to split the deduction. Thanks!
Hi Deborah, that’s another good question that’s related to the SE tax issue.
As far as who takes the deduction, my initial reaction is that, like other self-employed retirement plans and IRAs, the deduction would be taken 100% by the person who makes the contribution. I haven’t investigated the code section for that specific type of retirement account yet, but every preparer I know is deducting all types of self-employed retirement accounts 100% to the self-employed person until the IRS clearly says otherwise.
The real question is whether the maximum contribution should be calculated using 100% of Self-Employed earnings or 50%. Like the SE Tax issue, the IRS needs to provide more clarity on how they intend to interpret certain parts of Section 1402 before this can be answered. If you’re affected by this for 2010, you should probably extend your 2010 return (and therefore your time to make the contributions retro-active to 2010) and hope that the IRS provides greater guidance before October.
Actually, the 401K limit question is covered in Pub. 560: “There is a limit on the amount an employee can defer each year under these plans. This limit applies without regard to community property laws.” So I can contribute based on 100% of my SE income. The question remains, where is it deducted.
If that’s what Pub 560 says, then go ahead and use it. It may be wrong (Pubs sometimes are), but at least it will be wrong in a way the IRS agrees with, so you won’t be penalized for following it. A common misconception is that IRS publications are the law. The Internal Revenue Code is the law, the IRS publications are only the way the IRS intends to apply the IRC, at the time of that publication. So that’s why I don’t use the Pubs as a primary reference.
Like I said in the first reply, the conventional approach right now is for the spouse who earned the SE income to deduct 100% of the contribution (on Line 28 of Form 1040…is that what you’re asking?). I haven’t had a client with a Self-Employed 401k and in an RDP relationship yet, so I haven’t researched that specific type of retirement plan yet…different code sections apply depending on the type of plan. Good luck
I filed my and my husband’s taxes in early Feb, only finding out about Pub 555 after receiving our refunds. Now I need to amend the filing to account for community property. We don’t have any special issues: jointly owned house, both have incomes, itemize deductions and a few stock transactions. Everything is considered JOINT.
Can I wait for Turbo Tax to update their software (if they do) to amend the returns? I understand there is a three year time period for amending.
Thanks!
Steve
That’s correct. You have 3 years from the filing deadline or the date you actually filed your return (whichever is later) to file an amendment claiming a refund. In the vast majority of cases, filing returns using the community property rules results in a better tax treatment (and hence a refund) on the amended returns. So no need to hurry.
First off, thank you for the wonderful website. It’s been really hard to find tax information online!
I’ve been reading over publication 555 and am not clear on how to take our deductions. I understand splitting income and filing as single and I also understand that if you are married filing separately you cannot take the standard deduction if your spouse is itemizing deductions however since we are not filing as married (we are rdp) but instead filing a single, can I take the standard while my partner itemizes? And then we split our W-2s? also, we have two children, can either my partner or both of us file as head of household?
Thank you in advance for any information you can provide.
Yes, you can definitely file with one partner itemizing and the other taking the standard deduction. The rule you mention doesn’t apply since the government doesn’t recognize that your are “spouses”. However, usually all of your deductible expenses are paid from “community funds”, so you have to split all the deductions evenly anyway. Community funds are wages and other earned income during the period you’ve had your RDP relationship, and income from community property. Since most people get most of their income, and pay most of their expenses, with wages or self-employment income, the result is most expenses are split 50/50. But if you’re an exception–one or both of you has substantial assets that you brought into the relationship or acquired via gift or inheritance, and you use those assets to pay deductible expenses–then you’re certainly free to itemize & take the standard deduction on your Individual returns.
Your children can generally be claimed by either one of you, or you could each claim one. Only one person can file head of household in any household since, mathematically, it’s impossible for two people to both provide “more than half” of the household support. If all you have is community funds that paid all household expenses, then technically neither of you would be head of household because you are each deemed to pay exactly half the total. But creative use of separate assets (gifts come in handy here) can usually get around this with a little planning.
My Dad died in Nevada on 7/1/2011. He was 79 years old. He lived and worked in Illinois and was receiving a pension from Illinois prior to his marriage of 2 years. Is that pension considered community property in Nevada?
And I am the successor trustee of his trust can I file a 1040 in his name as married filing separte along with the estate tax return?
See my latest post for a response.
Thank you for this wonderful website! I have a question regarding education credit & student loan interest deduction. I understand the income allocation concept between RDP but don’t really know how to account for the deductions & credits.
Do I split the student loan interest deduction 50/50? And if I have a 1098-T and education credit, do half of the qualifying tuition and education credit go on to my spouse’s return?
Thank you so much!
Jamie
Hi Jamie, student expenses are treated as being paid entirely by the student. Even the portion deemed to come from your spouse under community property law is treated as a “gift” to you, and then a payment from you to the school. So any education credits/deductions based on tuition payments should be taken by the person who is the qualified student. The IRS is a little less clear about the student loan interest payments, but it logically seems that the same rules should apply to the student loan payments as well. (Not that logic is always the guiding principle in the tax arena…) That and other information about deciding who takes which deductions can be found in this article, and a few others in the archives.
If you rent personal home with VRBO or Airbnb, can you deduct hotel expenses during the time the house is rented?
No.
I’d add a citation but the filing deadline is about 24 hours away, so I’ll just say that lodging costs are only deductible when you have to travel for business far enough away from your main home that an overnight stay is necessary. Somebody staying at your house doesn’t meet that criteria. Of course, if you can find a legitimate business reason to take a trip at the same time somebody’s staying in your house, then you can deduct the cost of the trip while your home would have been unavailable anyway.