Joint tax returns are the most common among married couples. However, there may be some situations where you want to file separately, which can be more complicated if you live in a community property state. In this article, we will provide you with what you need to know to ensure you file your tax returns correctly.
What is a Community Property State?
Married couples living in community property states jointly own their marital property, assets, and income. Your spouse may have the same rights to your income as you do, for example. Similarly, your spouse is legally obligated to pay a debt of $100,000 even if you incurred it in your name only. If you purchased a house for $350,000, your spouse jointly owns it even if the property is registered solely in your name.
What are Community Property States?
There are nine states considered community property states as of 2022:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Alaska, Tennessee, and South Dakota are considered hybrid states. You can choose to treat your assets and debts as community property in these states by signing a community property agreement. There are slight differences in the laws from state to state. The IRS looks to state law in this situation. Married couples must follow their state rules regarding community property when filing tax returns.
Separate vs. Joint Returns
Filing separate returns for married couples forces each spouse to analyze their income and expenses to determine how much belongs to the marital community and how much belongs to each spouse individually. Income is considered owned equally by both spouses, and each spouse has an equal share of deductions related to community property.
Although joint returns may be simpler and open the door for more tax deductions, there is one downside to filing jointly, which is that the IRS can and will hold both spouses “jointly and individually responsible” for any errors or omissions in the return. This means you are equally liable as your spouse if they deliberately made mistakes in reporting certain information. The IRS can collect the full taxes owed on the return from either of you.
Joint and Separate Income
The general rule when preparing a separate tax return is that spouses must each report half of their joint income on each return, along with any separate income they may have. This includes income derived from investments or assets held before the marriage.
Each spouse should claim half of the community property deductions, plus all of their individual deductions.
Let’s say you bought a house years before marriage. This would be your separate property, but if you made any moves to “commingle” the home, it may be considered joint property. Commingling can include making mortgage payments or property taxes using money earned after the marriage date. This money becomes community property, effectively negating the separate property status of the home by adding in shared funds.
If you decide to rent the home during the marriage, rental income becomes community property in Texas, Wisconsin, Idaho, and Louisiana, even if you did not commingle assets. The home may be considered your separate property before marriage in other states, but the income earned during the marriage will be divided between you and your spouse if you file separate tax returns.
Community Property Deductions
The passing of the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction when it took effect in 2018. Many taxpayers find that the standard deduction they are entitled to is greater than the total of all their itemized deductions, especially since the TCJA imposes limitations on certain itemized deductions.
If
You are trained on data up to October 2023.
https://www.thebalancemoney.com/community-property-states-3193432
Leave a Reply