Iowa Administrative Code › Agency 701 - Revenue Department › Title IV - Individual Income Tax › Chapter 302 - Determination of Net Income › Rule 701-302.15 - Reporting of Incomes by Married Taxpayers Who File a Joint Federal Return but Elect to File Separately for Iowa Income Tax Purposes

Current through Register Vol. 47, No. 3, July 24, 2024
Married taxpayers who have separate incomes and have filed
				  jointly for federal income tax purposes can elect to file separate Iowa returns
				  or to file separately on the combined Iowa return form. Where married persons
				  file separately, both must use the optional standard deduction if either elects
				  to use it, or both must claim itemized deductions if either elects to claim
				  itemized deductions. The provisions of Treasury Regulation §1.63 -1 are equally applicable
				  regarding the election to use the standard deduction or itemized deductions for
				  Iowa income tax purposes. The spouses' election to file separately for Iowa
				  income tax purposes is subject to the condition that incomes received by the
				  taxpayers and the deductions for business expenses are allocated between the
				  spouses as the incomes and deductions would have been allocated if the
				  taxpayers had filed separate federal returns. Any Iowa additions to net income
				  and any deductions to net income which pertain to taxpayers filing separately
				  for Iowa income tax purposes must also be allocated accurately between the
				  spouses. Thus, if married taxpayers file a joint federal return and elect to
				  file separate Iowa returns or separately on the combined Iowa return, the
				  taxpayers are required to compute their separate Iowa net incomes as if they
				  had determined their federal adjusted gross incomes on separate federal returns
				  with the Iowa adjustments to net income.
However, the fact that the taxpayers file separately for Iowa
				  income tax purposes does not mean that the spouses will be subject to
				  limitations that would apply if the taxpayers had filed separate federal
				  returns. Instead, tax provisions that are applicable for taxpayers filing joint
				  federal returns are also applicable to the taxpayers when they file separate
				  Iowa returns unless the tax provisions are superseded by specific provisions in
				  Iowa income tax law.
For example, married taxpayers that file separate federal
				  returns cannot take the child and dependent care credit (in most instances) and
				  cannot take the earned income credit. Taxpayers that file a joint federal
				  return and elect to file separately for Iowa income tax purposes can take the
				  child and dependent care credit and the earned income credit on their Iowa
				  returns assuming they meet the qualifications for claiming these credits on the
				  joint federal return.
The following paragraphs and examples are provided to clarify
				  some issues and provide some guidance for taxpayers who filed a joint federal
				  income tax return and elect to file separate Iowa returns or separately on the
				  combined Iowa return form.
1. Election
				to expense certain depreciable business assets. When married taxpayers who have
				filed a joint federal return elect to file separate Iowa returns or separately
				on the combined Iowa return form, the taxpayers may claim the same deduction
				for the expensing of depreciable business assets as they were allowed on their
				joint federal return of up to $100,000 (for the tax year beginning on or after
				January 1, 2003, and which is adjusted annually for inflation for subsequent
				tax years) as authorized under Section 179 of the Internal Revenue Code. In a
				situation where one spouse is a wage earner and the second spouse has a small
				business, the second spouse may claim the same deduction for expensing
				depreciable assets of up to $100,000 (for the tax year beginning on or after
				January 1, 2003) that was allowable on the taxpayers' joint federal return. The
				fact that a spouse elects to file a separate Iowa return or separately on the
				combined return form after filing a joint federal return does not mean the
				spouse is limited to the same deduction for expensing of depreciable business
				assets of up to $50,000 (for the tax year beginning on or after January 1,
				2003) that would have applied if the spouse had filed a separate federal
				return.
In situations where a married couple has ownership of a
				  business, the deduction for the expensing of depreciable assets which is
				  allowable on the spouses' joint federal return should be allocated between the
				  spouses in the same ratio as incomes and losses from the business are reported
				  by the spouses. Subrule 40.15(4) sets out criteria for allocation of incomes
				  and losses of businesses in which married couples have an ownership
				  interest.
2. Capital
				losses. Except for the Iowa capital gains deduction for limited amounts of net
				capital gains from certain types of assets described in rule
				701-40.38 (422), the federal
				income tax provision for reporting capital gains and losses and for the
				carryover of capital losses in excess of certain amounts are applicable for
				Iowa individual income tax purposes. When married taxpayers file a joint
				federal income tax return and elect to file separate Iowa returns or separately
				on the combined return form, the spouses must allocate capital gains and losses
				between them on the basis of the ownership of the assets that were sold or
				exchanged. That is, the spouses must allocate the capital gains and losses
				between them on the separate Iowa returns as the capital gains and losses would
				have been allocated if the taxpayers had filed separate federal returns instead
				of a joint federal return. However, each spouse is not subject to the $1,500
				capital loss limitation on the separate Iowa return which is applicable to a
				married taxpayer that files a separate federal return. Instead, the spouses are
				collectively subject to the same $3,000 capital loss limitation for married
				taxpayers filing joint federal returns which is authorized under Section
				1211(b) of the Internal Revenue Code. In circumstances where both spouses have
				net capital losses, each of the spouses can claim a capital loss of up to
				$1,500 on the separate Iowa return. In a situation where one spouse has a net
				capital loss of less than $1,500 and the other spouse has a capital loss
				greater than $1,500, the first spouse can claim the entire capital loss, while
				the second spouse can claim the portion of the net capital loss on the joint
				federal return that was not claimed by the first spouse. In no case can the net
				capital losses claimed on separate Iowa returns by married taxpayers exceed the
				$3,000 maximum capital loss that is allowed on the joint federal return. In a
				circumstance where one spouse has a net capital loss and the other spouse has a
				net capital gain, the amounts of capital gains and losses claimed by the
				spouses on their separate Iowa returns must conform with the net capital gain
				amount or net capital loss amount claimed on the joint federal return for the
				taxpayers. The following examples illustrate how capital gains and losses are
				to be allocated between spouses filing separate Iowa returns or separately on
				the combined Iowa return form for married taxpayers who filed joint federal
				returns.
EXAMPLE 1. A married couple filed a joint federal return
				  which showed a net capital loss of $3,000. All of the capital loss was
				  attributable to the husband, as the wife had no capital gains or losses.
				  Therefore, when the taxpayers filed separate Iowa returns, the husband's return
				  showed a $3,000 capital loss and the wife's return showed no capital gains or
				  losses.
EXAMPLE 2. A married couple filed a joint federal return
				  showing a net capital loss of $3,000, which was the maximum loss they could
				  claim, although they had aggregate capital losses of $8,000. The husband had a
				  net capital loss of $6,000 and the wife had a net capital loss of $2,000. When
				  the taxpayers filed their separate Iowa returns each spouse claimed a net
				  capital loss of $1,500, since each spouse had a capital loss of up to $1,500.
				  The husband had a net capital loss carryover of $4,500 and the wife had a net
				  capital loss carryover of $500.
EXAMPLE 3. A married couple filed a joint federal return
				  showing a net capital loss of $2,500. The husband had a net capital gain of
				  $7,500 and the wife had a net capital loss of $10,000. The wife claimed a net
				  capital loss of $10,000 on her separate Iowa return, while the husband reported
				  a net capital gain of $7,500 on his separate Iowa return.
EXAMPLE 4. A married couple filed a joint federal return
				  showing a net capital loss of $3,000. The wife had a net capital loss of $800
				  and the husband had a net capital loss of $2,500. The wife claimed a $800 net
				  capital loss on her separate Iowa return. The husband claimed a net capital
				  loss on his separate Iowa return of $2,200 which was the portion of the net
				  capital loss claimed on the joint federal return that was not claimed by the
				  wife. The husband had a net capital loss carryover of $300.
3. Unemployment compensation benefits. When a
				husband and wife have filed a joint federal return and elect to file separate
				Iowa returns or separately on the Iowa combined return form, the spouses are to
				report the same amount of unemployment compensation benefits on their Iowa
				returns as was reported for federal income tax purposes as provided in Section
				85 of the Internal Revenue Code. When unemployment compensation benefits are
				received in the tax year the benefits are to be reported by the spouse or
				spouses who received the benefits as a result of employment of the spouse or
				spouses. Nonresidents of Iowa, including nonresidents covered by the reciprocal
				agreement with Illinois, are to report unemployment compensation benefits on
				the Iowa income tax return as Iowa source income to the extent the benefits
				pertain to the individual's employment in Iowa. In a situation where the
				unemployment compensation benefits are the result of employment in Iowa and in
				one or more other states, the unemployment compensation benefits should be
				allocated to Iowa on the basis of the individual's Iowa salaries and wages for
				the employer to the total salaries and wages for the employer. However, to the
				extent that unemployment compensation benefits pertain to a person's employment
				in Iowa for a railroad and the benefits are paid by the railroad retirement
				board, the benefits are totally exempt from Iowa income tax pursuant to
				45 U.S.C. Section
				352(e).
(1)
Income from property in which
				only one spouse has an ownership interest but which is not used in
				business.
If ownership of property not used in a business is in the
				name of only one spouse and each files a separate state return, income derived
				from such property may not be divided between husband and wife but must be
				reported by only that spouse possessing the ownership interest.
(2)
Income from property in which
				both husband and wife have an ownership interest but which is not used in a
				business.
A husband and wife who file a joint federal return and elect
				to file separate Iowa returns must each report the share of income from jointly
				or commonly owned real estate, stocks, bonds, bank accounts, and other property
				not used in a business in the same manner as if their federal adjusted gross
				incomes had been determined separately. The rules for determining the manner of
				reporting this income depend upon the nature of the ownership interest and, in
				general, may be summarized as follows:
a.
				Joint tenants. A husband and wife owning property as joint tenants with the
				right of survivorship, a common example of which is a joint savings account,
				should each report on separate returns one-half of the income from the savings
				account held by them in joint tenancy.
b. Tenants in common. Income from property
				held by husband and wife as tenants in common is reportable by them in
				proportion to their legally enforceable ownership interests in the
				property.
(3)
Salary and wages derived from personal or professional services
				performed in the course of employment.
A husband and wife who file a
				joint federal return and elect to file separate Iowa returns must report on
				each spouse's state return the salary and wages which are attributable to
				services performed pursuant to each individual's employment. The income must be
				reported on Iowa separate returns in the same manner as if their federal
				adjusted gross incomes had been determined separately. The manner of reporting
				wages and salaries by spouses is dependent upon the nature of the employment
				relationship and is subject to the following rules:
a. Interspousal employment-salary or wages
				paid by one spouse to the other. Wages or compensation paid for services or
				labor performed by one spouse with respect to property or business owned by the
				other spouse may be reported on a separate return if the amount of the payment
				is reasonable for the services or labor actually performed. It is presumed that
				the compensation or wages paid by one spouse to the other is not reasonable nor
				allowable for purposes of reporting the income separately unless a bona fide
				employer-employee relationship exists. For example, unless actual services are
				rendered, payments are actually made, working hours and standards are set and
				adhered to, unemployment compensation and workers' compensation requirements
				are met, the payments may not be separately reported by the salaried
				spouse.
b. Wages and salaries
				received by a husband or wife pursuant to an employment agreement with an
				employer other than a spouse. Wages or compensation paid for services or labor
				performed by a husband or wife pursuant to an employment agreement with some
				other employer is presumed income of only that spouse that is employed and must
				be reported separately only by that spouse.
(4)
Income from a business in which
				both husband and wife have an ownership interest.
Income derived from
				a business the ownership of which is in both spouses' names, as evidenced by
				record title or by the existence of a bona fide partnership agreement or by
				other recognized method of establishing legal ownership, may be allocated
				between spouses and reported on separate individual state income tax returns
				provided that the interest of each spouse is allocated according to the capital
				interest of each, the management and control exercised by each, and the
				services performed by each with respect to such business. Compliance with the
				conditions contained in paragraphs
"a"
or
"b"
of this subrule and consideration of paragraphs
"c," "d,"
and
"e"
of this subrule must be made in allocating income from a
				business in which both husband and wife have an ownership interest.
a. Allocation of partnership income.
				Allocation of partnership income between spouses is presumed valid only if
				partnership information returns, as required for income tax purposes, have
				currently been filed with respect to the federal self-employment tax law. An
				oral understanding does not constitute a bona fide partnership implied merely
				from a common ownership of property.
b. Allocation of income derived from a
				business other than a partnership in which both husband and wife claim an
				ownership interest. In the case of a business owned by a husband and wife who
				filed a joint federal income tax return in which one of them claimed all of the
				income therefrom for federal self-employment tax purposes, it will be presumed
				for purposes of administering the state income tax law, unless expressly shown
				to the contrary by the taxpayer, that the spouse who claimed that income for
				federal self-employment tax purposes did, thereby, with the consent of the
				other spouse, claim all right to such income and that therefore such income
				must be included in the state income tax return of the spouse who claimed it
				for federal self-employment tax purposes if the husband and wife file separate
				state income tax returns.
c.
				Capital contribution. In determining the weight to be attributed to the capital
				contribution of each spouse to a business, consideration may be given only to
				that invested capital which is legally traceable to each individual spouse.
				Capital existing under the right, dominion, and control of one spouse which is
				invested in the business is presumed to be a capital contribution of that
				spouse. Sham transactions which do not affect real changes of ownership in
				capital between spouses in that such transactions do not legally disturb the
				right, dominion, and control of the assignor or the donor over the capital must
				be disregarded in determining capital contribution of the recipient
				spouse.
d. Management and control.
				Participation in the control and management of a business must be distinguished
				from the regular performance of nonmanagerial services. Contribution of
				management and control with respect to the business must be of a substantial
				nature in order to accord it weight in making an allocation of income.
				Substantial participation in management does not necessarily involve continuous
				or even frequent presence at the place of business, but it does involve genuine
				consultation with respect to at least major business decisions, and it
				presupposes substantial acquaintance with an interest in the operations,
				problems, and policies of the business, along with sufficient maturity and
				background of education or experience to indicate an ability to grasp business
				problems that are appreciably commensurate with the demands of the enterprise
				concerned. Vague or general statements as to family discussions at home or
				elsewhere will not be accepted as a sufficient showing of actual
				consultation.
e. Services
				performed. The amount of services performed by each spouse is a factor to be
				considered in determining proper allocation of income from a business in which
				each spouse has an ownership interest. In order to accord weight to services
				performed by an individual spouse, the services must be of a beneficial nature
				in that they make a direct contribution to the business. For example, for a
				business operation, whether it is a retail sales enterprise, farming operation
				or otherwise, in which both husband and wife have an ownership interest, the
				services contributed by the spouses must be directly connected with the
				business operation. Services for the family such as planting and maintaining
				family gardens, domestic housework, cooking family meals, and routine errands
				and shopping, are not considered to be services performed or rendered as an
				incident of or a contribution to the particular business; such activities by a
				spouse must be disregarded in determining the allocable income attributable to
				that spouse.
This rule is intended to implement Iowa Code section
				  422.7.