Community Property Rules for Federal Income Tax Returns

Spouses must compute income and deductions using community property rules

Couple at table in home reading newspaper together
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Nine states have community property laws that govern how married couples share ownership of their incomes and property. These states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These laws have a significant impact on their tax situations.

Residents of Alaska, Tennessee, and South Dakota can "opt in" to community property law, handling their assets and their debts in this way if they want to.

What does it mean to your tax situation if you live in one of these states (or have elected to follow these laws in one of the opt-in states)? In short, it means you have to follow a whole unique set of tax provisions when you're reporting your income and calculating your federal tax liability.

What Is Community Income and Community Property?

Each spouse legally owns an undivided one-half interest in the total income and property of the marital community when they live in a community property state. If a married couple living in a community property state choose to file separately, they must evenly divide their total income and property for their separate returns.

You may also own your own separate income if it comes from separate property you hold, such as assets you owned prior to marriage or income generated by those properties.

Federal tax laws generally respect state laws in determining whether a source of income is community income and whether a property is community or separate property.

In general, community property is acquired while the couple is married and cannot be otherwise identified as separate property. Community income is generated by community property, as well as the full earnings of each spouse during the marriage. If your spouse earns $1,000 this week, $500 of that is attributable to you. Under community property law, you both equally earned it.

In community property states, a spouse may still have separate property under certain conditions. Separate property could have been owned separately before marriage or bought with separate funds or exchanged for separate property

Community property can also be converted to separate property through an agreement between spouses that is considered legally valid by the state. This is known as "transmutation." Transmutation laws vary from state to state, but they might not apply to every circumstance.

Inheritances and gifts clearly bequeathed to just one spouse are also typically considered to be that spouse's separate property. Separate income is generated by separate property. If you owned a house before you were married, and you now rent it out, that rental income is considered separate income.

In Idaho, Louisiana, Texas, and Wisconsin, income from most separate property is still considered community property.

How to File Community Income Taxes

If you are married and file a joint return, all of your income and deductions would be reported on a single return. If you are married and file separate returns, you and your spouse would each report one-half of your total community income and one-half of your total community deductions on their tax return.

What's Strategic About Community Property?

You might be able to achieve lower federal tax liability by filing separately rather than jointly.

For example, consider a couple who earns a combined total of $50,000 in a year. One spouse earns $40,000, and the other spouse earns $10,000. For most taxpayers, the threshold for itemized medical expense deductions is 10% of your adjusted gross income (AGI). A spouse with an AGI of $25,000 who files a separate return for that year could deduct any portion of medical expenses exceeding $2,500 (10% of $25,000 is $2,500).

However, if that same spouse were to file jointly on the marital income of $50,000, or $25,000 attributable to each spouse in a community property state, that threshold would increase to $5,000.

You may want to execute separate property agreements to take investments, real estate, and other property out of the marital community in states where this is possible. Talk to a tax professional to find out whether this is a feasible option for you.

Do You Have to Use Community Property Rules?

Married couples with at least one spouse residing in a community property state should follow the community property rules for allocating income and deductions. However, you might be able to disregard community property rules or use a modified set of community property rules under certain circumstances. For instance:

  • Community property rules might be disregarded if one spouse does not communicate the nature and/or amount of income, but this would be subject to proof. 
  • Community property rules can often be modified for spouses living apart from each other for the entire year.

Which Filing Status Should I Choose In a Community Property State?

Spouses can choose to file either jointly or separately in community property states, just as they would in other states. They can also file as head of household under certain circumstances.

Registered domestic partners and persons in civil unions can file as single for federal tax purposes, or, if they qualify, they can file as head of household. They cannot file as married at the federal level, on separate or joint returns.

Under federal law, you must meet three conditions to qualify as head of household:

  • You must be unmarried on the last day of the tax year. If you're legally separated from your spouse, this counts as "unmarried" under IRS rules. You can also qualify if you're not yet legally separated or divorced, but you and your spouse did not live together at any time during the last six months of the year. 
  • You must pay more than half the cost of maintaining your household. 
  • You must have a qualifying dependent who lived with you for more than half the year (unless the dependent is a qualifying parent).

Frequently Asked Questions (FAQs)

Do community property laws apply to same-sex couples?

Community property laws apply if you are legally married, whether you are a same-sex or different-sex couple. The IRS doesn't recognize registered domestic partnerships as marriages for federal tax purposes.

Do I have to report my marriage on my taxes?

Whether or not you are married affects your taxes, including how your income, deductions, and credits work. You do not have to file jointly, but you must indicate whether or not you are married when you file your taxes.

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