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how to handle income from separate accounts

If you are married and filing a joint return, how do you handle income from separate accounts (including trust accounts)? The issue is that the account is separate, yet taxes on the dividends, capital gains, interest from the account is paid from a joint account. What happens if the couple later splits or divorces? It seems unfair that the spouse who owns the separate account gets to keep all of it as taxes on the profits of it were paid jointly. It would seem logical to me that you must recalculate total tax without any of the separate income, and pay the difference to the other spouse in the event of a divorce.

BEGIN QUOTE publication 555

Income from separate property. In some states, income from separate property is separate income. These states include Washington, Nevada, California, Arizona, and New Mexico. Other states characterize income from separate property as community income. These states include Idaho, Louisiana, Wisconsin, and Texas.

END QUOTE

I suppose if you live in TX have a prenup that specifies that income from separate property is separate income, it would override the above quote from publication 555.

Does filing a MFJ return mean you are co-mingling the accounts, and thus it loses its characteristic as separate property?

Reply to
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wrote

You seem to believe that tax laws have to follow other laws, like divorce laws, or that it has to be logical.

In your first paragraph, divorce attorneys will hash out how much is his and how much is hers. This is regardless of how the assets are titled, how the income was reported and where the money came from to pay the taxes on that income.

Prenups do not trump tax laws and community property laws with respect to income tax reporting.

Filing taxes jointly does not change ownership of the income or the underlying assets.

Reply to
paulthomascpa

If you are no longer living together as a community, you no longer need to treat separate property as community property as of the separation date. At least in some CP states.

But if you both elect to file MFJ, you both will work out how you will split tax payments and refunds. Once you file MFJ, IRS wants no part of any disagrements between the two of you.

Or you can choose to file MFS, and even if that's the poorest tax decision, it might make you somehow feel better about filing.

Reply to
Arthur Kamlet

I agree with Paul Thomas' comment.

As for the question above, I think the tax filing status is but one factor of many that can be used to determine the jointness or separateness of property & income.

For example, MFS vs. MFJ filing status might be a factor in determining when the marital community ended. (Assuming we are in the context of community property states).

Reply to
Mark Bole

what happens is that you have a mess on your hands. regardless of filing MFJ or MFS, the taxes attributable to separate property should be paid out of that separate property. Otherwise there will be an argument made that the separate property is no longer separate. Whether that will prevail is dependant on a lot of other factors, as well as a bit of luck. If you intend to keep separate property separate, do everything to avoid even the appearance that separate property has not been strictly held as separate property.

It seems unfair that the

no, you should do this annually.

yes, it should.

no, but if you pay taxes on separate income from community assets, it might. It will certainly be argued that it did.

Reply to
Pico Rico

These discussions are interesting, but aren't they beyond the scope of this group? Aren't they legal issues in the event of a divorce, not tax issues?

There are all sorts of things that could happen. Capital gains and losses. A Roth conversion of an IRA that is separate. Gains or losses from a business that is separate. Suppose that one spouse has self-employment income, but they take all that income and deposit it in a joint account, but then take assets from a separate non- retirement account and contribute them to a self-employed retirement account, thus achieving a tax deduction? What if one party owns a home that is separate property, but the mortgage and property taxes reduce the couple's taxable income?

Let the divorce lawyers sort it out.

Reply to
Hank Youngerman

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