What if Spouses Live in Community Property & Common Law States?

When married couples live in different states, their financial lives can become complicated for tax purposes. The United States has two marital property systems: common law and community property. Most states follow the common law system, where property acquired by one spouse is their sole property unless titled jointly. Nine states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—use the community property system, which treats most assets and income acquired during the marriage as owned equally by both spouses.

The characterization of income as either separate or community property has significant implications for how a couple must file their federal and state tax returns. When spouses live in states with different property systems, they must understand these rules for proper tax reporting.

Establishing Domicile and Its Tax Impact

A person can have multiple residences, but only one domicile. Domicile is your true, fixed, and permanent home—the place you intend to return to after any absence. For federal tax purposes, the law of the state where the income-earning spouse is domiciled determines whether income is separate or community property. For example, if the spouse earning a salary is domiciled in Texas (a community property state), that income is community property, even if the other spouse is domiciled in Florida (a common law state).

State tax authorities look at various factors to determine a person’s domicile. Evidence includes where you are registered to vote, the state that issued your driver’s license, and where your vehicle is registered. Other considerations are the location of your primary bank accounts, your social or religious affiliations, and the address used on legal documents.

A state may conduct a residency audit if it suspects a change in domicile is not legitimate. The taxpayer has the burden of proof to demonstrate their intent to establish a new domicile. Maintaining detailed records of time spent in each state and updating all official records are practical steps to substantiate a change of domicile.

Classifying Income as Community or Separate

All income must be classified as either community or separate based on the domicile of the spouse who earned it. Community income is earned by a spouse domiciled in a community property state and includes salaries, wages, and other compensation. For instance, if a spouse domiciled in California earns a $120,000 salary, that entire amount is community income, and half legally belongs to the other spouse, even if that spouse lives in a common law state.

Separate income includes all income earned by a spouse domiciled in a common law state. It also includes inheritances or gifts made to a single spouse in a community property state. Income generated from separate property, such as a pre-marital rental property, is also considered separate income in most community property states.

The rules for income from separate property can vary among community property states. In Texas, Louisiana, Idaho, and Wisconsin, income generated from separate property is treated as community property unless an agreement states otherwise. In other states, like California and Arizona, income from separate property remains separate, so it is important to know the specific rules of the domiciliary state.

Allocating Community Income and Withholdings

All income identified as community income is pooled and then divided equally, with 50% belonging to each spouse for federal tax purposes. This 50/50 split applies regardless of which spouse earned the money and is particularly important when a couple files as Married Filing Separately.

For example, a spouse domiciled in New Mexico (a community property state) earns a $100,000 salary, which is community income. The other spouse, domiciled in Colorado (a common law state), earns $60,000, which is separate income. The $100,000 community income is split, with each spouse attributed $50,000. The $60,000 remains the separate income of the spouse who earned it.

When filing separate returns, the New Mexico spouse reports $50,000 (their half of the community income). The Colorado spouse reports $110,000 ($60,000 separate income plus their $50,000 share of community income). This allocation ensures each spouse reports their legal share of the total marital income.

These allocation rules also apply to federal income taxes withheld from wages. Any federal income tax withheld from community income must be split 50/50 between the spouses on their separate tax returns. Each spouse claims credit for half of the taxes withheld on the community wages.

Filing Federal Tax Returns

Spouses have two primary filing options: Married Filing Jointly (MFJ) or Married Filing Separately (MFS). When filing a joint return, all income from both spouses is combined into a single total amount. While the distinction between community and separate income is important for state tax filings, it does not change the total income on a joint federal return.

The allocation rules are most impactful when spouses file as Married Filing Separately. In this case, each spouse must file their own Form 1040, reporting their separate income plus their one-half share of any community income. Using the prior example, the New Mexico spouse would report $50,000, while the Colorado spouse would report $110,000 on their respective MFS returns.

Couples filing separately under these circumstances must attach Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, to each of their tax returns. This form provides a detailed breakdown of how total community and separate income were allocated between the spouses. It reconciles the amounts on individual returns with the total income figures reported by employers.