Here’s what you need to know if you are married, live in a community property state, and are getting ready to file your income taxes.
What Is Community Income and Community Property?
Each spouse legally owns an undivided one-half interest in the total income and property of the marital community when they live in a community property state. If a married couple living in a community property state chooses to file separately, each person must evenly divide the total income and property for their separate returns. Federal tax laws generally respect state laws in determining whether a source of income is community income and whether a property is a community or separate property. In general, community property is acquired while the couple is married and cannot be otherwise identified as separate property. Community income is generated by community property, as well as the full earnings of each spouse during the marriage. For example, if your spouse earns $1,000 this week, $500 of that is attributable to you. Under community property law, you both equally earned it. In community property states, a spouse may still have separate property under certain conditions. Separate property could have been owned separately before marriage or bought with separate funds or exchanged for separate property Community property can also be converted to separate property through an agreement between spouses that is considered legally valid by the state. This is known as “transmutation.” Transmutation laws vary from state to state, but they might not apply to every circumstance. Inheritances and gifts clearly bequeathed to just one spouse are also typically considered to be that spouse’s separate property. Separate income is generated by separate property. If you owned a house before you were married, and you now rent it out, that rental income is considered separate income.
How To File Community Income Taxes
If you are married and file a joint return, all of your income and deductions would be reported on one tax return for both spouses. If you are married and file separate returns, you and your spouse would each report one-half of your total community income and one-half of your total community deductions on your own tax return.
What’s Strategic About Community Property?
You might be able to achieve lower federal tax liability by filing separately rather than jointly. In a community property state, when you file separately, each spouse claims one-half of the income and property. For example, consider a couple who earns a combined total of $50,000 in a year. One spouse earns $40,000, and the other spouse earns $10,000. For most taxpayers, the threshold for itemized medical expense deductions is 7.5% of your adjusted gross income (AGI). A spouse with an AGI of $25,000 who files a separate return for that year could deduct any portion of medical expenses exceeding $1,875 (7.5% of $25,000 is $1,875). However, if that same spouse were to file jointly on the marital income of $50,000, or $25,000 attributable to each spouse in a community property state, that threshold would increase to $3,750.
Do You Have To Use Community Property Rules?
Married couples with at least one spouse residing in a community property state should follow the community property rules for allocating income and deductions. However, you might be able to disregard community property rules or use a modified set of community property rules under certain circumstances:
Community property rules might be disregarded if one spouse does not communicate the nature and/or amount of income, but this would be subject to proof.Community property rules can often be modified for spouses living apart from each other for the entire year.
Which Filing Status Should You Choose In a Community Property State?
Spouses can choose to file either jointly or separately in community property states, just as they would in other states. They can also file as head of household under certain circumstances. Under federal law, you must meet three conditions to qualify as head of household:
You must be unmarried on the last day of the tax year: If you’re legally separated from your spouse, this counts as “unmarried” under IRS rules. You can also qualify if you’re not yet legally separated or divorced, 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 the cost of maintaining your household: So if you’re the sole parent and provider for the house, you may be able to claim this status. You must have a qualifying dependent who lived with you for more than half the year: The only exception is if the dependent is a qualifying parent—they do not need to live with you.
