Publication 555: Filing Status in Community Property States

IRS Publication 555, “Community Property,” is a guide for married couples and registered domestic partners in states with community property systems. It explains how federal tax law interacts with these state laws, which can influence the calculation of income on a federal tax return. This is particularly relevant for those who choose to file separately from their spouse, as the rules dictate how to report income and deductions.

Identifying Community Property and Community Income

Community property is defined as assets that a couple acquires during their marriage while living in a community property state. This includes earnings from work, property bought with those earnings, and items the couple agrees to convert from separate to community property. In contrast, separate property includes assets owned by one spouse before the marriage, gifts or inheritances received by only one spouse, and money earned while living in a noncommunity property state.

The United States has nine community property states:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Additionally, Alaska, Florida, Kentucky, South Dakota, and Tennessee have opt-in community property systems requiring a formal agreement. The laws of the state where you are domiciled determine how your property and income are classified.

This distinction is important because it determines whether income is community or separate. Community income is generated from community property or the earnings of either spouse during the marriage, including salaries and wages. Separate income is derived from separate property.

Classifying Specific Types of Income

Wages, Salaries, and Other Earned Income

Compensation for services performed by either spouse during the marriage while living in a community property state is almost always community income. This means wages, salaries, bonuses, and commissions are pooled for tax purposes, regardless of which spouse earned them. If one spouse earns a salary and the other has no earned income, the entire salary is still treated as community income.

Income From Separate Property

Income generated by separate property, such as rent from a building owned by one spouse before the marriage, can have its classification change based on state law. In some states, income produced by separate property remains separate income. However, in other community property states, this income is treated as community income, so it is important to check the rules of your state.

Income From Community Property

Any income produced by community property is considered community income. For example, if a couple uses community funds to open a joint savings account, any interest earned is community income. Similarly, dividends from stock purchased with community funds are also classified as community income.

Retirement and Pension Income

Distributions from pensions, IRAs, and other retirement plans can be complex. The character of the income depends on the contributions made to the plan. The portion of the retirement income attributable to contributions made with community funds during the marriage is community income. The portion attributable to contributions made with separate funds, such as before the marriage, is separate income.

Allocating Income and Deductions on Your Tax Return

The principles of community property most significantly impact couples who file as Married Filing Separately (MFS). When filing separate returns, each spouse is required to report 100% of their own separate income. The defining feature for this filing status is the treatment of community income, where each spouse must report exactly 50% of the total, regardless of who earned it.

This 50/50 split also applies to deductions. Expenses paid using community funds are split equally between the spouses on their separate returns. For example, if a couple pays for property taxes from a joint checking account funded with community income, each spouse would claim half of that expense on their MFS return.

To show this division, taxpayers must attach Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, to their tax returns. This form reconciles the amounts reported on source documents, like a W-2 showing 100% of wages, with the amounts actually reported on the tax return. On Form 8958, taxpayers list the total community income by category and show how it has been allocated, with 50% assigned to each spouse.

Special Rules and Relief Provisions

Spouses Living Apart

An exception to the standard community property rules applies to couples who have separated. If spouses live apart for the entire calendar year, do not file a joint return, and one or both have earned income, they may be able to treat their income differently. Under specific IRS conditions, the earned income of one spouse can be treated as that spouse’s separate income, preventing them from being taxed on half of the other’s earnings.

Relief From Community Property Laws

In situations where one spouse fails to inform the other about community income and acts as if they are solely entitled to it, the uninformed spouse may seek relief. This provision can absolve a taxpayer from the tax liability on the unreported income. To qualify, the innocent spouse must establish they did not know about, and had no reason to know about, the item of community income.

Registered Domestic Partners

The community property rules that apply to married couples also extend to Registered Domestic Partners (RDPs) in certain states, including California, Nevada, and Washington. RDPs in these states must report their income according to the same community property principles, splitting community income equally when filing federal tax returns.

Moving Between States

Tax situations can become more complex when a couple moves from a common law state to a community property state, or vice versa. The character of property acquired before the move is retained. For instance, property that was separate in a common law state remains separate property after a move to a community property state. Community property acquired in a community property state also retains its character if the couple moves to a common law state.