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 on a separately filed tax return. Most deductions will be split evenly, with each spouse reporting half the total, but some must be allocated separately. Still, other deductions can have a mixed allocation.
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. This is referred to as "separate property."
Rules for deductions and reporting income are classified by whether the underlying asset is community property or separate property, or whether the income is community income or separate income, in the nine community property states.
Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin observe community property law as of 2021. 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The Tax Cuts and Jobs Act (TCJA) repealed personal exemptions from 2018 through 2025, but they could potentially come back if Congress does not renew the terms of the TCJA before the end of 2025.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 filed jointly.
Each spouse would take their own personal exemption if they filed separate returns in 2017, and 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 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. Generally, it's advisable 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 will be 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 while 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, provided that 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 is 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 alimony deduction was also repealed by the TCJA for divorce or separation agreements or decrees entered into after December 31, 2018. This also covers older orders or agreements changed after 2018.
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.
It's possible that the alimony deduction will return if the TCJA is permitted to expire at the end of 2025. Spouses receiving alimony would also have to claim it as income, should the deduction be reinstated.
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 and a separate deduction for the paying spouse.