Community Property Rules for Federal Income Tax Returns
Spouses must compute income and deductions using community property rules
Nine states have community property laws that govern how married couples hold ownership of their incomes and property: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These laws have a significant impact on their tax situations.
Residents of Alaska can "opt in" to community property law, handling their assets and their debts in this way if they want to.
So what does it mean to your tax situation if you live in one of these states or have opted in to community property law in Alaska? You have to follow your state's laws when you're reporting your income and calculating your federal tax. This means a whole unique set of tax provisions.
Community property laws also apply to same-sex spouses and registered domestic partners who live in California, Nevada, and Washington. Same-sex couples in these states must follow their state's community property laws. They would not have to do so in other states.
The IRS doesn't recognize registered domestic partnerships as marriages for tax purposes at the federal level.
Filing Status Issues
Under federal law, you must meet at least three stringent rules 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.
Registered domestic partners and persons in civil unions can file either as single or head of household for federal tax purposes, if they qualify. But they cannot file as married at the federal level, either on separate or joint returns, even if they reside in California, Nevada, or Washington.
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. They also own their own separate income and any separate property they hold, such as assets they owned prior to marriage or income generated by such properties.
Federal tax laws generally respect state laws in determining whether a source of income is community income and whether property is community or separate property.
- Community property is considered that which is acquired while the couple is married, and it cannot be otherwise identified as separate property.
- Community income is the income generated by such 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.
- Separate property is property that was owned separately before marriage, property bought with separate funds or exchanged for separate property, and property that both spouses have agreed to convert from community property to separate property through a legally valid spousal agreement, a process called transmutation. Transmutation laws are strict and vary from state to state, and they might not apply to every circumstance. Inheritances clearly bequeathed to just one spouse are also typically considered to be that spouse's separate property.
- Separate income is income that's generated by separate property, such as if you own a premarital home that you now rent out.
Reporting Community Income and Claiming Community Deductions
Each spouse reports one-half of total community income and one-half of total community deductions on his or her tax return when they file separate married returns.
All community income and deductions would be reported and claimed on joint married returns.
Each spouse can report his or her own separate income and separate deductions on either separate or joint married returns.
What's Strategic About Community Property?
Spouses might be able to achieve lower federal tax liability by filing separately rather than jointly.
For example, the threshold for itemized medical expense deductions increased from 7.5% to 10% of adjusted gross income (AGI) as of January 2019. A spouse with an AGI of $25,000 who was filing a separate return could deduct any portion of medical expenses exceeding $2,500. But if that same spouse were to file jointly on marital income of $50,000, or $25,000 attributable to each spouse in a community property state, that threshold would increase to $5,000.
Spouses might also find it advantageous 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 if this is a feasible option for you.
Do You Have to Use Community Property Rules?
Married persons where at least one spouse resides 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:
- 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.
Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
Internal Revenue Service. "Publication 555 (01/2019), Community Property," Accessed Nov. 27, 2019.
Internal Revenue Service. "Publication 501 (2018), Dependents, Standard Deduction, and Filing Information," Head of Household. Accessed Nov. 27, 2019.