Hi, I live in California and will be married filing separately (by Oct 15 extension). I have self employment income but my husband does not. How do I enter this on our federal returns? Does he have to file a SE form and Schedule C reporting 1/2 of the profit and deductions etc.

Also, for last years taxes (2007) we were married but he never lived in the U.S. He is Swiss and we had lived in Switzerland together for some years. I came to California in September 2007 and had less than $1000 U.S. income from Sept to the end of the year. I filed married filing separately but did not combine and split our incomes since he was never a resident here. Was that correct or should I have filed one return with $500 for me and one with $500 for him?

Since my income after I moved to California was well below the limits for California, I didn't file a state return at all. Now I am wondering if the 30,000 minimum was supposed to include my income when I was in Switzerland too? And/or was I supposed to include my husbands income?

I am new to this community tax stuff! I would appreciate any help!

Thanks

A nonresident alien can only be taxed in the US on US sourced income.
You, on the other hand, are taxable in the US on your worldwide income no matter where you live.

I suggest you carefully read:
Publication 555 (5/2007), Community Property (http://www.irs.gov/publications/p555/ar02.html#d0e230)
To help eliminate your confusion.

For 2007, you should have filed as a non-resident alien, which means the SE tax did NOT apply. You may not have even had a legal requirement to file for 2007, given your U.S.-sourced income level. For 2007, your Swiss income DID NOT COUNT!

For 2008, I am ssuming that you have met the Substantial Presence Test and MUST file as a resident alien, filing Form 1040 with Schedules C and SE to report your self-employment income. If you had ANY Swiss income for 2008, that income must be reported as well, but you can claim a Foreign Tax Credit using Form 1116 for income taxes paid on that Swiss income.

Since you are filing separately, you report ONLY your income on your federal return.

Is this woman a Swiss national or a US citizen?

Hi, Thanks for your comments. Hopefully I can get this worked out.

I am a US citizen and have lived in the US for the entire year 2008. My husband is Swiss and came on a green card in November 2008. Community Income Pub 555 says "If you file a federal tax return separately from your spouse, you must report half of all community income and all of your separate income." So I began to do that but didn't understand how to do it with self employment. I have since found the instructions for SE regarding community income although it's still not clear to me. Here it is. Maybe someone can break it down for me.

"If you and your spouse had community income and file separate returns, attach schedule SE to the return of the spouse with the self employment income. Also, attach schedule C (showing the spouses share of community income and expenses) to teh return of each spouse.

If you are the spouse who carried on the business, you must include on schedule SE line 3 the net profit or loss reported on the other spouses schedule C. Enter on the dotted line "community income taxed to spouse" and the amount of any net profit or loss allocated to your spouse as income. Add that amount with the total of lines 1a 1b and 2 and enter the result on line 3.

If you are not the spouse who carried on the business, enter "exempt community income" on form 1040 line 57..."

So I report half of the earnings, half of the expenses and half of the net profit on C for both of us. Then only file the SE for me and pay the whole SE tax?

****

For 2007 I filed a 1040 and used foreign earned income exclusion for my Swiss income. This left me with 900 self employment income and $130 SE tax due. I read that if you have over $400 SE income, you must file and pay, so I did for federal. For state, even with my Swiss income included I was under the filing requirement. Now when I look at the Calfornia filing requirement it says to include all income from all sources of both spouses. Even a 100% non California resident spouse/income? I am hoping I was right in not needing to file state taxes.

Now what about 2007 federal? If I am supposed to be giving half of my earnings to my spouse as it says in pub 555, then wouldn't he have US source income to report for 2007? And then need to file 2007 federal as a nonresident?

My head is spinning!

Ok, I have found the answer to some of my questions! From pub 555...

If you are a U.S. citizen or resident and do not choose to treat your nonresident alien spouse as a U.S. resident for tax purposes, treat your community income as explained next under Spouses living apart all year. However, you do not have to meet the four conditions discussed there.

So for 2007 and 2008 we can file separately and disregard the community property laws, at least up until November when he became a resident.

So now I just need to figure out how to do this correctly. Does my interpretation of the procedure for filing SE and C in my previous post sound right? Any insights on this?

Thanks!

This is from Pub. 519, Publication 519 (2008), U.S. Tax Guide for Aliens (http://www.irs.gov/publications/p519/ch02.html#en_US_publink100039037)

Community Income
If you are married and you or your spouse is subject to the community property laws of a foreign country, a U.S. state, or a U.S. possession, you generally must follow those laws to determine the income of yourself and your spouse for U.S. tax purposes. But you must disregard certain community property laws if:

Both you and your spouse are nonresident aliens, or

One of you is a nonresident alien and the other is a U.S. citizen or resident and you do not both choose to be treated as U.S. residents as explained in chapter 1.

In these cases, you and your spouse must report community income as explained below.

Earned income. Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. That spouse must report all of it on his or her separate return.

Trade or business income. Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. That spouse must report all of it on his or her separate return.

Partnership income (or loss). A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. The partner must report all of it on his or her separate return.

Separate property income. Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. That spouse must report all of it on his or her separate return. Use the appropriate community property law to determine what is separate property.

Other community income. All other community income is treated as provided by the applicable community property laws.

I think that about sums it up. May I suggest you find a competent tax professional there in California to assist you in filing this next tax season.

Wait a minute; something you wrote puzzzles me.

In your first post you state that your husband had never been in the US. Then you say he came on a green card in 2008. How did he get a green card if he was never in the States before?

Wow, Thanks a lot Five Rings! So for 2007 taxes, I should be fine then.

Since my husband became a resident in November of 2008, we are both residents of a community state for November and December 2008 though. Now I still have to figure out how to do that. If anyone has a clue how to do this, please let me know. It's the self employment income that is bugging me.

I have the instructions (in my long post above) but it's still not clear. My best guess is to prorate the SE income and expenses for the 2 months, divide them by 2, file a schedule C for my husband with 1/2 of the 2 month amounts and mine with the rest? Yikes. I don't think the IRS would even understand what was going on.

In my next life, I will have my foreign spouse arrive on green card on midnight of January 1.

To answer your question Five Rings, my husband had visited the US before, but never was a resident. We lived in Switzerland for some years, got married there and applied for the green card from there.

And yes, if anyone knows a tax professional who specializes in these things (dual status returns, married filing separate with partial year residents in a community state... ) in San Diego area, let me know.

Thanks for your help!

Ok, I think I have the final answer!

IRC Sec. 1402(a)(5)(A)

If any of the income derived from a trade or business (other
Than a trade or business carried on by a partnership) is
Community income under community property laws applicable to
Such income, the gross income and deductions attributable to such
Trade or business shall be treated as the gross income and deductions
Of the spouse carrying on such trade or business or, if such trade or
Business is jointly operated, treated as the gross income and deductions
Of each spouse on the basis of their respective distributive share of
The gross income and deductions;

Here is a list of tax professionals who practice in the San Diego area. They are all members of the Nat'l Assoc. of Tax Professionals (NATP)

https://www.natptax.com/EWEB/DynamicPage.aspx?Site=NATP&WebKey=14738f75-f7ba-4a99-b269-13e698b80caa&FromSearchControl=Yes

The IRS considers a tax professional to be a CPA, EA, or a tax attorney and they all must conform to the provisions of Circular 230.

You may wish to contact several to determine who is familiar with international issues, dual status taxpayers, treaty provisions, community property, etc.

Thanks for the link. 5 rings. I will seek help.



Since you are filing separately, you report ONLY your income on your federal return.

Atlanta Tax Expert, You said that I only report my own income for my federal return when filing separately. Even though I am in a community property state for the whole year (and my husband for partial year)? What about pub 555? Does that not apply or is it not enforced?

I found a rule that says when one spouse is a non resident, that you disregard community property laws, so I know for the first part of the year we can keep our income separate, but what about Nov-Dec when he was a resident?

Thanks

You will need to pro-rate his and your income for those last two months, then divide the sum of that pro-ration equally between your two returns.

Ok, so I had an accountant figure this out for me. Although that doesn't necessarily mean they did it correctly either, but here's what they did. For federal we each reported our own income, no community split at all. I thought we would have had community income for Nov-Dec. For state they added my total income plus my husband's 2 months of resident income, and divided by 2. The difference between federal and state was shown under California adjustments. I am still not sure if this is correct, but that's what the "professional" had me do. We'll see how that goes.