All across the country, married couples who routinely file joint federal tax returns are sharpening up their pencils and juicing up their calculators so they can file separately and take advantage of some breaks that mean separate returns can save money for many people this year.
But wait a minute. Toss those separate returns in the trash if you live in California or seven other community property states. Except in the rarest of instances, there is no advantage to filing separate returns for California residents because the federal government follows the state rules and considers all income community property.
The catch catches even tax experts off guard, temporarily anyway.
George H. McCrimlisk, a tax partner in the Los Angeles office of Peat Marwick Main & Co., the world's largest accounting firm, was describing the circumstances under which the new tax law makes it advisable for couples to file separate returns.
"In about 90% or 95% of the cases, married couples should file on a joint basis," McCrimlisk said. "The times when it makes sense to file on a separate basis are where one spouse may have a very low income and the other spouse may have a very high income. Then you start to get some advantages."
For instance, he said, separate returns might save money if the spouse who earned less had a large amount of personal deductions, such as medical bills that were not covered by insurance. These bills cannot be deducted until they top 7.5% of adjusted gross income, up from 5% in previous years. It's easier to deduct them, he said, on a one-income return, particularly for a low earner.
And then there are casualty losses, such things as uninsured damage. . . .
"Wait a minute," McCrimlisk said, stopping himself in mid-sentence. "California is a community property state, and this income splitting would not apply here. State law controls how the federal government interprets your income. I can't see where medical deductions would be beneficial. I can't see where casualty loss would be beneficial."
He went on to say that there might be some circumstances in which one spouse held property separately from the other and income from the separate property would not have to be counted as community property. Wealthy couples, for instance, might benefit if they each have their own holdings and one may have experienced losses in 1987 while the other experienced gains.
"But for the most part," McCrimlisk said, "earned income is going to be split 50-50, so you won't get the advantages."
In addition to California, the other community property states are Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. Laws vary somewhat from state to state, but they usually consider any property, including income, received through the efforts of a husband or a wife as the couple's joint property.
The question of when to file separately did not catch Robert Giannangeli at the Internal Revenue Service in Los Angeles off guard.
"About the only time it is beneficial in California is if you have some sort of prenuptial agreement and you retain separate status of properties and do not commingle funds," said Giannangeli, an IRS public information officer. "Then it might be advantageous to one of the parties. But in the vast majority of cases in California, most couples do not have that kind of arrangement, and filing separately is not of benefit."
Another instance, Giannangeli said, would be in the case of an inheritance, which is not counted as community property. But that, too, covers a tiny group of taxpayers. For the remainder, the burden of income taxes is shared jointly.