Nine states have community property laws that govern the ownership of income and property between married persons: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Married persons in these states will need to follow their state’s community property laws when reporting their income and calculating their federal income tax. Community property laws also apply to same-gendered spouses and registered domestic partners residing in California, Nevada, and Washington.
Federal law will generally follow state law regarding what is considered community property.
Filing Status Issues
Spouses can choose to file either jointly, or separately, or in certain circumstances as head of household.
Registered domestic partners and persons in a civil union can file either as single or head of household (if they meet the criteria). Registered domestic partners cannot file as married (either separate or joint) for federal tax purposes since they are not considered married under state law. (See, IRS.gov, Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions.)
Community Income and Community Property in General
In the community property states, each spouse legally owns an undivided one-half interest in the total income and property of the marital community, plus their own separate income and separate property. Federal tax laws generally respect state laws in determining whether an item of income is community income and whether the property is community or separate property.
Community property is property acquired while married and cannot be otherwise identified as separate property. Community income is the income generated by such community property.
Separate property is a 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).
Separate income is income generated by such separate property.
Each spouse reports one-half of total community income and one-half of total community deductions on their separate tax returns. Additionally, each spouse would report their own separate income and separate deductions. Be aware that this general rule may not apply some types of income and deductions.
- Identifying Community Income and Separate Income
- Identifying Community Deductions and Separate Deductions
What’s Strategic about Community Property
- Spouses may be able to achieve lower federal tax liability by filing separately rather than jointly.
- Spouses may find it advantageous to execute separate property agreements to take investments, real estate, and other property out of the marital community.
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 may be able to disregard community property rules or use a modified set of community property rules if you’re estranged from your spouse.
- Community property rules are disregarded if the spouse does not communicate the nature and amount of income
- Community property rules are modified for spouses living apart from each other for the entire year.
For these points, I refer you to pages 7-9 of Publication 555, Community Property(pdf).
Community Property Rules in Detail
- Community Property Income Allocations
- Community Property Deductions
- Tax Withholding and Estimated Tax Payments under Community Property Rules
- Tips for Preparing a Tax Return using Community Property Rules