Community property laws affect how you figure your income on your federal income tax return if you are married, live in a community property state or country, and file separate returns. If you are married, your tax usually will be less if you file married filing jointly than if you file married filing separately. However, sometimes it can be to your advantage to file separate returns. If you and your spouse file separate returns, you have to determine your community income and your separate income.

There are nine Community Property States in the United States: 

  • Arizona 
  • California
  • Idaho
  • Louisiana
  • Nevada 
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Community or Separate Income and Property 

As discussed above, 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. Generally, the state laws in where you live govern whether you have community property and community income or separate property and separate income for federal tax purposes. The following is a summary of the general rules of community or separate property and income.  

Community property is property: 

  • That you, your spouse (or your registered domestic partner), or both acquire during your marriage (or registered domestic partnership) while you and your spouse (or your registered domestic partner) are domiciled in a community property state (includes the part of property bought with community property funds, if part was bought with community funds and part with separate funds);
  • That you and your spouse (or your registered domestic partner) agreed to convert from separate to community property; and
  • That can’t be identified as separate property.

Community income is income from: 

  • Community property;
  • Salaries, wages, or pay for services of you, your spouse (or your registered domestic partner), or both during your marriage (or registered domestic partnership) while domiciled in a community property state; and
  • Real estate is treated as community property under the state’s laws where the property is located.

Separate property is 

  • Property that you or your spouse (or your registered domestic partner) owned separately before your marriage (or registered domestic partnership);
  • Money earned while domiciled in a non-community property state;
  • Property that you or your spouse (or your registered domestic partner) received separately as a gift or inheritance during your marriage (or registered domestic partnership);
  • Property that you or your spouse (or your registered domestic partner) bought with separate funds, or acquired in exchange for separate property, during your marriage (or registered domestic partnership);
  • Property that you and your spouse (or your registered domestic partner) converted from community property to separate property through an agreement valid under state law; and
  • The part of property bought with separate funds, if part was bought with community funds and part with separate funds.

Separate income is the spouse’s separate income (or the registered domestic partner) who owns the property.

In general, state of community property laws apply to wages, earnings, profits, dividend income, and rents from common property and must be evenly split. Alimony received, gains and losses; pension, lump-sum distribution, military retirement pay, etc. will be characterized as community or separate depends on marital status, and the periods of certain types of income held or gained. There is also a general effect of community property laws on treating certain credits, taxes, and payments on your separate return, such as self-employment taxes, estimated tax payment. On certain occasions, community property laws may not apply to an item of community income that you received but didn’t treat as community income. 

For information on how and when to request relief from liabilities arising from community property laws, please ask tax professionals at Abacus CPAs for help with your tax situation.

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