Code 66(a): Tax Rules for Separated Spouses
Separated in a community property state? A specific tax rule may allow you to file based on your own income instead of splitting it with your estranged spouse.
Living in a community property state can create a complicated tax situation when you separate from your spouse but are not yet legally divorced. Under the laws of these states, the income either of you earns is considered to be owned equally by both. This means that even after you’ve separated, you could be held responsible for the income tax on half of the earnings of a spouse you no longer have financial ties with, leading to an inequitable tax bill.
When it comes time to file taxes, if you and your estranged spouse cannot or will not file a joint return, the default rule requires each of you to report one-half of the total community income on your separate returns. This can create a significant financial burden, as you may be taxed on money you never personally received.
Understanding Community Income Treatment for Separated Spouses
The tax code provides a specific rule that can offer relief in these circumstances. This provision allows certain separated spouses in community property states to deviate from the standard 50/50 income split. Instead of being taxed on half of your spouse’s income, this special rule permits you to be taxed only on the income you personally generated, treating your earned income as your separate income for tax purposes.
This rule specifically targets what the IRS considers “earned income,” which includes wages, salaries, professional fees, and other amounts received as payment for personal services. It also covers income from a trade or business, assigning it to the spouse who is operating that business. The rule does not apply to all types of income, however. Income generated by community property assets, such as interest, dividends, or rent, generally remains subject to the standard 50/50 split under state law.
Conditions for Qualification
To benefit from this tax relief, you and your spouse must meet a strict set of four conditions laid out in the Internal Revenue Code. Failing to meet even one will disqualify you from using this special income allocation method. The rules are designed to ensure that only spouses who are genuinely living separate financial lives can bypass the standard community property income rules.
Living Apart
The first requirement is that you and your spouse must have lived apart for the entire calendar year. This means from January 1 through December 31, you cannot have resided in the same household. The IRS interprets “living apart” to mean maintaining separate residences, and temporary absences for a vacation or business trip do not count. The separation must be complete and continuous throughout the taxable year.
Filing Status
The second condition is that you and your spouse cannot file a joint tax return for the year in question. The purpose of this tax provision is to provide a fair method for allocating income when spouses are filing separately. By choosing to file a joint return, you agree to combine your incomes and be held jointly liable for the entire tax bill. You must file using a “Married Filing Separately” status or, if you qualify, “Head of Household.”
No Income Transfers
A third condition is that no portion of the earned income of one spouse can be transferred to the other spouse during the calendar year. This rule prevents spouses from benefiting from the tax provision while still sharing income. This means you cannot give your spouse money from your paycheck, nor can they give you money from theirs, either directly or indirectly. An indirect transfer could include paying your spouse’s personal bills. However, payments made to support the couple’s dependent children are not considered transfers that would violate this rule.
Community Property State
This tax rule is only available to individuals who are domiciled in a community property state. The tax complication this rule solves is unique to the legal framework of these nine states. You must have been domiciled in one of these states during the tax year for which you are seeking relief. The states with these laws are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Applying the Rule to Your Tax Return
Once you have confirmed that you meet all the necessary conditions, you apply the rule to your tax return. You will prepare your Form 1040 using the “Married Filing Separately” status. The core action is to report 100% of your own earned income and none of your spouse’s. For example, if you received a Form W-2, you will report the full amount of wages, and if you are self-employed, you will report all of your gross income and expenses on Schedule C.
This same logic applies to tax withholding. You are entitled to claim the full amount of federal income tax withheld from your own paycheck, as reported on your Form W-2. You cannot claim any of the withholding from your spouse’s paycheck. It is a recommended practice to attach a statement to your tax return indicating that you are filing under this specific provision to prevent confusion or inquiries from the IRS. The statement can be simple, declaring: “I am filing according to the provisions of Internal Revenue Code Section 66(a).”