Community Income and Joint Property
Both spouses have an undivided interest in the total income and property of the marital community when living in a community property state. If the married couple chooses to live in a community property state and files taxes separately, each person must divide the total community income and property equally for their separate returns.
Filing Community Income Tax Returns
If you are married and file a joint return, you will report all of your income and deductions on one tax return for both spouses.
If you are married and file separate returns, you and your spouse will each report half of the total community income and half of the total community deductions on your respective tax returns.
Strategy Regarding Joint Property
You may be able to achieve a reduction in federal tax liabilities by filing a separate return instead of a joint return. In a community property state, when filing a separate return, each spouse claims half of the income and property.
For example, suppose there are a couple earning a total of $50,000 per year. One earns $40,000 and the other earns $10,000. For most taxpayers, the threshold for deducting medical expenses is 7.5% of adjusted gross income (AGI). The spouse with an AGI of $25,000 who files separately that year can deduct any portion of medical expenses that exceed $1,875 (7.5% of $25,000 is $1,875).
However, if the couple files a joint return for the joint income of $50,000, or $25,000 attributed to each spouse in a community property state, the threshold increases to $3,750.
You may want to establish separate property agreements to exclude investments, real estate, and other assets from the marital community in states where this is possible. Consult with a tax professional to find out if this is a viable option for you.
Should You Follow Community Property Rules?
Married couples, with at least one residing in a community property state, must follow community property rules for allocating income and deductions. However, you may be able to disregard community property rules or use a modified set of rules under certain circumstances:
Community property rules may be disregarded if one spouse has not reported the nature and/or amount of income, but this must be substantiated.
Community property rules can often be adjusted for couples who live apart from each other throughout the year.
What Type of Tax Filing Status Should You Choose in a Community Property State?
Couples can choose to file either jointly or separately in community property states, just as they can in other states. They can also file as head of household under certain conditions.
Registered domestic partners and individuals in civil unions may file as single for federal tax purposes, or, if eligible, they can file as head of household. They cannot file as married for federal purposes, whether on separate or joint returns.
Under federal law, you must meet three conditions to be eligible for head of household status:
You must be unmarried on the last day of the tax year: If you are legally separated from your spouse, that counts as “unmarried” under IRS rules. You may also qualify if you are not legally separated or divorced yet, 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 of the household expenses: If you are the only parent and the sole support of the household, you may be eligible to claim this status.
You must
Having dependents living with you for more than half the year: the only exception is if the dependents are qualifying parents – they do not need to live with you.
Frequently Asked Questions
Do community property laws apply to same-sex couples?
Community property laws apply if you are legally married, whether you are a same-sex couple or different-sex couple. The IRS does not recognize registered civil partnerships as marriages for federal tax purposes.
Do I have to report my marriage on my tax returns?
Whether you are married or not affects your taxes, including how your income and deductions and credits work. You are not required to file jointly, but you must indicate whether you are married when filing your returns.
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Sources:
The Balance only uses high-quality sources, including peer-reviewed studies, to support the facts in our articles. Please read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
IRS. “Publication 555, Community Property.”
IRS. “Publication 502, Medical and Dental Expenses.”
IRS. “Publication 501, Dependents, Standard Deduction, and Filing Information.”
Source: https://www.thebalancemoney.com/community-property-rules-for-federal-income-tax-returns-3192849
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