Community Property Deductions and Non-Deductible Marital Property

Couple doing taxes together at home
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Married couples who choose not to file joint returns must identify their community income and community deductions so they know how much each spouse should report and claim on a separate tax return. Most deductions will be split evenly, with each spouse reporting half the total, but you must allocate some separately. Other deductions can have a mixed allocation.

Key Takeaways

  • The issue of who gets which deductions when a couple is married in a community property state is only a factor if they file separate tax returns. 
  • One deciding factor is whether the associated property is a community or separate asset.
  • Separate property is that which was owned prior to the marriage or received by gift or inheritance; marital money never contributed to its upkeep. The spouse who owns separate property is entitled to the associated tax deduction.
  • Either parent can claim one or more of their children as dependents, but they can’t “split” a child, and they can’t both claim the same child. 


Splitting Tax Deductions

A distinction is made between assets that are considered legally owned by both spouses as their marital community, referred to as "community property," and those that are legally considered to be owned only by one spouse. These are referred to as "separate property."

Rules for deductions and reporting income are classified by whether the underlying asset is community property or separate property in the nine community property states, and whether the income is community income or separate income,

Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin observe community property law as of 2022. Spouses in Alaska can opt to enter into a community property agreement.

A deduction for investment expenses would be a community deduction if the investment were community property. The deduction would be a separate deduction for the spouse who earned the income if the investment were that spouse's separate asset. The deduction would be allocated in the same proportion if an investment were a mix of community and separate property.

Allocating Personal Exemptions

The Tax Cuts and Jobs Act (TCJA) repealed personal exemptions from 2018 through 2025. They could potentially come back if Congress doesn't renew the terms of the TCJA before the end of 2025. The exemption was $4,050 in 2017 for each spouse and each of their dependents, so a family of four could subtract $16,200 off their taxable incomes if they were to file jointly.

Each spouse would have taken their own personal exemption if they filed separate returns in 2017. They will do that again if the exemptions return in 2026. The couple can decide who takes the personal exemptions for their dependents if they have any. A dependent can be claimed by only one taxpayer.

A personal exemption can't be split. If a couple has three qualifying children, for example, one spouse can take all three dependents, or two, or one, or none of their dependents. They cannot take 1.5 exemptions.

Standard Deduction vs. Itemized Deductions

Married couples filing separately must both itemize, or they must both take the standard deduction. You might want to take whichever option is more beneficial across both separate returns.

The Deduction for Traditional IRAs

Individual retirement accounts (IRAs) are considered to be a spouse's separate property under federal tax laws. Each spouse will determine their eligibility for a traditional IRA deduction based on earned income calculated without regard to the community property rules. The same goes for determining eligibility for a Roth IRA.

Mortgage Interest and Property Tax Deductions

Tax deductions relating to real estate are allocated based on whether the property is community property or separate property. The deduction for mortgage interest and property taxes would be split evenly if the home were owned as community property. The spouse who is the owner of the property would take the deductions if the home were owned as separate property.

These are both itemized deductions, so one spouse can't claim them if the other claims the standard deduction if they file separate returns.

Personal Itemized Deductions

Personal expenses, such as those for medical expenses, gifts to charity, and college tuition, would be deductible for the spouse who actually paid the expense if they're paid from that spouse's separately maintained funds. Again, many of these are itemized deductions, so one spouse couldn't claim them if the other were claiming the standard deduction on a separate return.

Spouses would evenly divide the deduction between themselves if the expense were paid out of community funds, such as a jointly owned bank account.

The Alimony Deduction

The TCJA also repealed the alimony deduction for divorce or separation agreements or decrees entered into after December 31, 2018. This also covers older orders or agreements if they were changed after 2018.

It's possible that the alimony deduction will return if the TCJA expires at the end of 2025. Spouses receiving alimony would also have to claim it as income, should the deduction be reinstated.

Outside of those time frames, alimony was deductible for the spouse making the payment, to the extent that the payments exceeded 50% of the spouse's imputed community income if one spouse were paying alimony or separate maintenance to the other spouse prior to their divorce being finalized.

Each spouse is considered to already own half of the community income, so transfers of those amounts are tax-neutral. Amounts in excess of the community income allocations are separate income to the receiving spouse. They're a separate deduction for the paying spouse.

Frequently Asked Questions

Is it better to file a separate return or a joint return when you’re married?

The married filing jointly status is considered the far better option of the two. The Internal Revenue Code prohibits separate filers from claiming certain tax credits and deductions. The rules regarding qualifying for others are stricter.

How is income reported on a separate tax return in a community property state?

Spouses who file separate tax returns must report their half of the community or marital income and the total of any separate income they may have received. Separate income is anything that derives from separate property, such as rents produced from premarital real estate.

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