How Wisconsin Community Property Tax Rules Work

Wisconsin is one of nine states with a community property framework for marital assets, established under the state’s Marital Property Act. This system treats a marriage as a partnership where both spouses equally share the income and assets acquired after the wedding. The law governs the property rights of married residents during their marriage, at death, and in the event of divorce, establishing a presumption that property owned by spouses is marital property.

The system views marriage as a single economic unit, recognizing that both spouses contribute to the partnership’s financial health, even if only one earns a salary. This principle has consequences for how income is reported for tax purposes, particularly when spouses file their tax returns separately.

Identifying Community and Individual Property

Under Wisconsin’s Marital Property Act, all property acquired by either spouse after the “determination date” is presumed to be marital property. The determination date is the latest of the following: the wedding day, the date both spouses established Wisconsin residency, or January 1, 1986. Assets and income are considered owned equally, with each spouse holding an undivided one-half interest, regardless of whose name is on the title.

Marital property includes wages, salaries, bonuses, and income from other marital assets like interest or dividends. In Wisconsin, even income derived from one spouse’s separate property is classified as marital property, a rule that differs from some other community property states.

Individual property, also called separate property, is the exception to this rule. This includes assets owned before the marriage and gifts or inheritances received by only one spouse during the marriage. To maintain its status, the asset must be kept separate from marital funds. If individual property is mixed with marital property, a process known as commingling, it can be presumed to be entirely marital property.

For instance, an inheritance deposited into a new, separate bank account in one spouse’s name remains individual property. If that same inheritance is deposited into a joint checking account used for shared expenses, the funds become commingled. The law would then presume the entire account is marital property unless detailed records can prove which portion is individual.

Tax Filing Obligations for Spouses

The impact of Wisconsin’s community property system on federal tax returns depends on the filing status. For spouses filing a “Married Filing Jointly” (MFJ) return, the distinction between property types has minimal impact. On a joint return, all income is combined, so the property classification does not change the total income or tax liability.

The rules are more complex for spouses who file as “Married Filing Separately” (MFS). Wisconsin’s Marital Property Act requires a specific method for reporting income in this scenario. Each spouse must report 50% of the total community income on their separate return, regardless of who earned it, meaning the reported income may not match their Form W-2.

For example, if Spouse A earns $80,000 and Spouse B earns $20,000, their total community income is $100,000. If they file separately, both Spouse A and Spouse B must each report $50,000 of community income on their respective federal tax returns.

Income from individual property, such as a separately maintained inheritance, is treated differently. It is reported entirely by the spouse who owns it and is not subject to the 50/50 split. Properly classifying all assets and income is a necessary step before preparing MFS returns.

Required Forms and Calculations for Separate Filers

Spouses in Wisconsin filing separate federal tax returns must allocate their community income and certain deductions. The primary federal form for this is Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States. This form must be attached to each spouse’s Form 1040 when filing separately.

Form 8958 provides the IRS with a detailed breakdown of how community income and expenses were divided. Filers list all sources of community income and certain deductions, showing the total amount and the 50% allocated to each spouse. This ensures the amounts on the separate returns are correctly calculated.

For state tax purposes, Wisconsin provides Schedule MP, Marital Property – Married Persons Filing Separate Returns. This schedule functions similarly to the federal form, adjusting income according to the Marital Property Act for the state return. It also addresses potential differences between federal and Wisconsin reporting of marital property income.

The allocation process involves totaling all community income and deductions for the tax year and dividing it equally. Each spouse reports their half on their separate return, along with 100% of any income from their individual property. Federal income tax withheld from community wages is also allocated, with each spouse claiming credit for half of the total withholding.

Tax Implications of Special Circumstances

The standard application of marital property rules can be altered by life events like divorce or the death of a spouse. These situations introduce unique tax considerations. Spouses can also proactively modify the rules through legal agreements.

Divorce

In the year a divorce is finalized, the treatment of income is split. Income earned by either spouse from the beginning of the year until the date the divorce decree is final is considered marital property. This income must be split 50/50 on their separate tax returns for that year. Income earned after the final divorce decree is separate income and reported solely on that individual’s return.

Death of a Spouse

A tax advantage arises upon the death of a spouse due to the “double step-up” in basis. Normally, an inherited asset’s cost basis is “stepped up” to its fair market value at the date of death, reducing future capital gains taxes. In Wisconsin, both the deceased’s and the survivor’s half of all marital property receive this step-up. For example, if stock bought for $20,000 is worth $100,000 when a spouse dies, the survivor’s new basis for the entire asset is $100,000, allowing a sale at that price with no capital gains tax.

Marital Property Agreements

Spouses in Wisconsin can create legally binding marital property agreements, similar to prenuptial or postnuptial agreements, to alter the state’s default rules. These agreements can classify property differently, for instance, by stipulating that each spouse’s wages remain their individual property. A valid agreement overrides the standard community property system and its associated tax reporting rules, but it must be legally sound under state law.