Married couples who live in community property states jointly own their marital property, assets, and income. It's your spouse's income as much as it is yours if you earn $80,000 a year, for example. Likewise, your spouse is legally obligated to repay a $100,000 debt even if you contracted for it in your sole name. Your spouse jointly owns the property if you buy a $350,000 home, even if you title it in your name alone.
Needless to say, these rules can complicate things at tax time if you don't file a joint married return.
Which States Are Community Property States?
There are only nine community property states as of 2022:
- New Mexico
Alaska is something of a hybrid. You can elect to treat your assets and debts as community property in this state by signing a joint agreement to do so.
There are slight variances in the laws from state to state. The IRS defers to state law in this situation. Married couples must follow their specific state's rules for community property at tax time.
Separate vs. Married Returns
Filing separate married returns forces each spouse to analyze their income and expenses to figure out how much belongs to the marital community and how much, if any, belongs to each spouse separately. Just as income is considered to be earned by both spouses equally, community deductions are owned by each spouse equally.
But there's a downside to filing a joint married return. The IRS can and will hold both spouses "jointly and severally liable" for any errors or omissions on the return. This means that you're just as responsible as your spouse is if they intentionally "goof" when reporting certain information. And the IRS can collect the full tax due on the return from either of you.
Community and Separate Income
The general rule when preparing a separate tax return is that spouses must report half of their community income on each return, as well as all their separate income. This would generally be income derived from premarital investments or assets.
Spouses would each claim half of their community deductions plus all of their separate deductions.
Suppose you purchased a home years before you were married. That would be your separate property, assuming that you never took any actions to "commingle" it, such as by making mortgage or property tax payments on it with money earned after the date of the marriage. That money would have been community property, so you've effectively erased the separate property status of the home by adding community money.
The rental income would become community property in Texas, Wisconsin, Idaho, and Louisiana if you decided to rent the property out while you're married, even if you didn't commingle the asset. It might be your separate, premarital property in other states, but the income it earned while you were married would be divided between you and your spouse if you file separate married tax returns.
Community Property Deductions
The passage of the Tax Cuts and Jobs Act (TCJA) more or less doubled the standard deduction when it went into effect in 2018. Many taxpayers find that the standard deduction they're entitled to is more than all of their itemized deductions added together, especially because the TCJA also places restrictions on some itemized deductions.
Who gets deductions that are related to assets in a community property state can be tricky if you do decide to itemize. Maybe your home is jointly owned. Maybe you want to claim the mortgage insurance deduction, but you're filing separate married returns. Can you just split the deduction between the two of you? You can, if both of your Social Security numbers appear on the Form 1098 you received from your lender. You must be contractually liable for any deduction you want to claim on your separate return.
Both you and your spouse must itemize your deductions if you file separate married returns. Federal tax law prohibits one spouse from itemizing while the other claims the standard deduction, even if you don't live in a community property state.
Claiming Your Dependents
You and your spouse can't both claim the same dependents if you have children unless you file a joint married tax return. Each dependent can only be claimed by one taxpayer per year.
You can "split" your dependents at tax time if you have more than one child. You could claim your son, and your spouse could claim your daughter, but only one spouse could claim a third child if you have three children.
Filing separate married returns can also disqualify you from claiming certain tax breaks, including these:
- Earned Income Tax Credit
- Child and Dependent Care Tax Credit
- Student loan interest deduction
- American Opportunity Tax Credit
- Lifetime Learning Tax Credit
- Adoption Tax Credit
Special rules apply to the Child and Dependent Care Credit for spouses who live separately.
You Might Want to Get Professional Help
The IRS offers guidance for spouses in community property states in Publication 555. It includes a special worksheet in Form 8958. The IRS cautions that you might want to consult with a tax professional as you prepare your separate tax returns. This is particularly wise if you own income-producing property or if you're thinking that you might want to itemize. A professional will probably want to run your tax returns both ways, assessing your tax liability or refund if you file jointly versus filing separate returns.
Frequently Asked Questions (FAQs)
What is community property?
Community property laws vary in the nine states that use them. Generally, any property acquired while a couple is married is jointly owned by both partners. The state considers the assets to be equally owned by both spouses even if only one partner is named on the deed or title.
What happens to community property when one spouse dies?
You're free to leave your half of the community property to whomever you wish when you die, but the implications vary a bit by state law. You can add the right to survivorship to your half of the property if you want to ensure that it all goes to your spouse without the trouble of probate proceedings. That would automatically pass your portion to your spouse.