If you file Married Filing Separately (MFS) and live in a community property state, you may need to complete Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States.
Form 8958 tells the IRS how you and your spouse divided community income, deductions, credits, and withholding on your separate tax returns.
Before you begin, gather:
- Your W-2 forms
- Your spouse's W-2 forms
- Any other community income documents
- Information about self-employment income or losses, if applicable
How to Allocate W-2 Income on Separate Returns
When filing separately in a community property state, each spouse generally reports one-half of the total community income and withholding.
Step 1: Enter All W-2 Forms
Create a W-2 entry in the program for:
- Each of your W-2s
- Each of your spouse's W-2s
Example:
If you have two W-2s and your spouse has one W-2, you should have three W-2 entries on your return.
Step 2: Adjust Income and Federal Withholding
For each W-2:
- Change Box 1 wages to one-half of the total community wage income.
- Change Box 2 federal withholding to one-half of the total federal withholding.
If the W-2 originally belongs to your spouse:
- Leave Boxes 3 through 6 blank.
If the W-2 belongs to you:
- Report Boxes 3 through 6 exactly as shown on your W-2.
Step 3: Adjust Other Community Income
If you have community income other than wages, update those entries so they reflect your one-half share of the income.
Examples may include:
- Interest income
- Dividend income
- Rental income
- Business income subject to community property rules
Step 4: Complete Form 8958
After adjusting all community income and withholding amounts, complete Form 8958.
The form explains why the income and withholding reported on your tax return differ from the amounts shown on the original tax documents.
How to Report Self-Employment Income or Loss in a Community Property State (MFS)
Self-employment income is generally considered community income in a community property state. However, self-employment (SE) tax is paid only by the spouse who performs the work.
Because of this rule:
- Income must be allocated between spouses for income tax purposes.
- Self-employment tax remains entirely with the operating spouse.
When Only One Spouse Operates the Business
Step 1: Enter the Full Schedule C
On the return of the spouse who operates the business:
- Open Schedule C.
- Enter all business income.
- Enter all business expenses.
- Allow Schedule C to calculate the full profit or loss.
This ensures self-employment tax is calculated correctly.
Step 2: Allocate the Income or Loss on the Operating Spouse's Return
Navigate to:
Federal → Income → Less Common Income → Other Income → Other Income
If the Business Has a Profit
Enter:
- Description: MFS Community Property Allocation – Schedule C
- Amount: One-half of the Schedule C profit as a negative number
Example:
- Schedule C profit: $10,000
- Other Income entry: -$5,000
This removes the non-operating spouse's share from taxable income while preserving the correct SE tax calculation.
If the Business Has a Loss
Enter:
- Description: MFS Community Property Allocation – Schedule C
- Amount: One-half of the loss as a positive number
Example:
- Schedule C loss: -$4,000
- Other Income entry: +$2,000
This removes the other spouse's share of the community loss from the operating spouse's return.
Step 3: Report the Allocation on the Non-Operating Spouse's Return
Do not create a Schedule C on the non-operating spouse's return.
Instead, go to:
Federal → Income → Less Common Income → Other Income → Other Income
Enter:
- Description: MFS Allocation of Self-Employment Income (or Loss)
Then enter:
- One-half of the profit as a positive amount, or
- One-half of the loss as a negative amount
Example:
- Schedule C profit: $10,000
- Non-operating spouse enters: +$5,000
Example:
- Schedule C loss: -$4,000
- Non-operating spouse enters: -$2,000
This gives each spouse the correct share of the community income or loss.
How Community Property Losses Are Split
A Schedule C loss is generally community property and must usually be divided equally between spouses.
Operating Spouse
- Reports the full loss on Schedule C.
- Has no self-employment tax if the business shows a loss.
- Enters one-half of the loss as positive Other Income to remove the other spouse's share.
Example:
- Schedule C loss: -$4,000
- Other Income entry: +$2,000
Non-Operating Spouse
- Reports one-half of the loss through Other Income as a negative amount.
Example:
- Other Income entry: -$2,000
This properly divides the loss while keeping the self-employment tax treatment correct.
What If Both Spouses Operate the Business?
If both spouses materially participate in the business:
- Each spouse should create a separate Schedule C.
- Each Schedule C should report:
- One-half of the business income
- One-half of the business expenses
This automatically divides:
- Income
- Expenses
- Self-employment tax obligations
No additional Other Income adjustments are needed.
What If I Don't Know My Spouse's Information?
If you are separated or divorced, determine whether you are still required to file as married under IRS filing status rules.
If you qualify to file as unmarried, choose the filing status for which you are eligible.
If you are required to file as Married Filing Separately:
- Your spouse's information is generally required to electronically file your return.
What If My Spouse Lives and Works in a Non-Community Property State?
Generally, income earned by a spouse who lives and works in a non-community property state is not treated as community income for federal tax purposes.
Community property treatment is usually determined by the laws of the state where the taxpayer is domiciled. Review your state's rules to determine whether income must be split on Form 8958.
Where Do I Enter Form 8958 Information in the Program?
Navigate to:
- Federal
- Miscellaneous Forms
- Allocation of Tax Amounts for Individuals in Certain States (Form 8958)
Enter your spouse's share of community income and any other applicable allocation amounts in the appropriate fields.
Additional Information
For more details about community property rules and income allocations, see:
These resources can help you determine which income, deductions, and withholding amounts must be divided between spouses when filing separate returns in a community property state.