Married but living in separate states part year

[Margaret CPA in OH]

New clients married 3 years finally living together mid-2023.  They are scientists from Argentina, green cards, who lived and worked in CT at Yale and MD at NIH.  For 2021 and 2022 they filed as single in their respective states not knowing differently. Their returns were self-prepared with Block software.

I'm struggling with how to prepare separate part-year states for each and joint Ohio.  Without preparing 9 returns (6 MFS each plus 3 MFJ) to see the outcomes, is there a quicker way to determine the best for them?  They have no income other than wages so I'm thinking just MFS this year (and amended py) is the way to go.  Sadly, I have now only 1040 program so each extra state is $40 (I already have my 3 selected and not CT or MD), then again, the 2023 income is rather substantial and they do understand this year will be a bit more costly before going back to normal.

Suggestions? And thanks!

[Lee B]

Margaret, I must say that you certainly come up with some unique tax scenarios

[Margaret CPA in OH]

Indeed, then another new one is a traveling nurse filing separately as spouse benefits from student loan repayments with lower income and in 2023 he inherited a taxable annuity.  I convinced him to decline filing for tax refund from another state for $58 as he would get a $33 OH credit plus it would cost him $40 for another state plus my time.

Then there is the caring big brother who moved a client with beginning dementia to OR to combine households for care giving.  But he moved from WA (thankfully no part year as no tax) to OR, too, and had not gotten a new preparer yet so I'm doing both.  And he just retired as a minister so pension is designated housing allowance and original client has OH tax free muni's now suddenly partially taxable in OR.  I suggested a review of her portfolio.

Keeps the little gray cells active but, oh, so tired now! And it's only mid-February!

I'm pretty sure the Argentinians will just be MFS all the way.

[schirallicpa]

On 2/12/2024 at 1:09 PM, Margaret CPA in OH said:

 

And he just retired as a minister so pension is designated housing allowance

Oh no - seems these preacher people are giving us all headaches this year.

But on the bright side - it's ash Wednesday and the fish fry specials will begin Friday!

[BulldogTom]

On 2/12/2024 at 12:09 PM, Margaret CPA in OH said:

And he just retired as a minister so pension is designated housing allowance

At the risk of showing my ignorance....You can do that?   Never had a retired minister so I am just wondering how one can get a pension and have it designated as Housing Allowance.    Do all the same rules apply?   How does one notify the fiduciary on an annual basis to tell them what portion of the pension is designated for housing.   Could a retired minister take a distribution from a 401K or IRA and designate it as housing?

Wow, never ever thought this was possible.   Can someone fill me in on how this works?

Tom
Longview, TX

[Margaret CPA in OH]

Yes, retired ministers can and do have a designated housing allowance. See the Clergy Housing Allowance Clarification Act of 2002. There are some conditions, of course, but Rev. Ruling 72-249 allows a local church to designate a portion of the retirement distributions it paid to a a retired minister as a housing allowance.  Rev. Ruling 75-22 allows a denominational pension fund (as is the case with my current retired minister) could designate a housing allowance because it was acting on behalf of local churches which have the authority to designate such if they maintain a retirement plan.  IRS Letter Ruling 773408 reached the same result.

This is also not subject to SE tax but one should still do the math (I have a great spreadsheet) to determine that it is not in excess of the FRV or actual expenses.  If so, the excess is included in taxable income as usual.

[BulldogTom]

I did a quick google search and I see what you are saying.   It is a sweet deal, but it appears that it can only be distributions from a 403(b) account.

So, in theory, if I have a senior citizen minister (I do) who is very close to retirement (he is) who has a 401K (he does) and he can convince his church to set up a 403(b), he could roll his 401K into the new 403(b) and when he retires he can take tax free housing allowance distributions?

Thanks for the education.   I love this board.

Tom
Longview, TX

[Lion EA]

49 minutes ago, Margaret CPA in OH said:

This is also not subject to SE tax but one should still do the math (I have a great spreadsheet) to determine that it is not in excess of the FRV or actual expenses.  If so, the excess is included in taxable income as usual.

Wait, the housing allowance is NOT subject to SE tax? I thought just not subject to income tax, but INCLUDED for SE tax. (I agree with the lesser of FRV, actual expenses, or designated HA to not be subject to income tax.) 

[Margaret CPA in OH]

You know, I didn't look into that but imagine that it must be 403(b) as set up by a nonprofit.  In the cases I've had (current and one prior retired couple, both ministers), the plans were denominational.  I think so long as the plan is a qualified plan, it doesn't have to be a 403(b) or annuity.  I don't have time for further research but lists SEPs, IRAs, nonqualified deferred compensation plans, tax-sheltered annuities (403(b) plans), church retirement income accounts, qualified pension plans, 401(k) plan, and "rabbi trust."

[Margaret CPA in OH]

Lion, from Church and Clergy Tax Guide, "The tax code specifies that self-employment tax does not apply to 'the rental value of any parsonage or any parsonage allowance (whether or not excludable under section 107) provided after the individual retires, or any other retirement benefit received by such individual from a church plan... after the individual retires' IRC 1402 (a)(8)." Also see Pub. 517.

[Lion EA]

Ah, AFTER retirement no SE tax on HA. Wow! That's quite a good benefit. And, they still continue deducting mortgage interest and property tax on Schedule A, right?

[Margaret CPA in OH]

Well, if the standard deduction isn't enough, I imagine so.  As we know, there are many special benefits for churches and clergy and many things 'religious' as for so many other special cases - mortgage interest and property tax among them.  Right or wrong, this is the current law.