Community Property States - How to Allocate Income (Separated Spouses)

IRS Publication 555 Community Property outlines the requirements for filing with a status of Married Filing Separate when you are domiciled in a community property state. TaxAct supports the completion of these returns so they can be electronically filed. There are two sections in the publication, "Community Property Laws Disregarded" starting on page 8 and "End of the Community" starting on page 9, which contains information regarding community property laws and how they work in separation situations. Often in the instructions, you will see that the IRS states to check with the State law where you are domiciled as that will determine whether you have community property and community income. If you and your spouse have different domiciles, check the laws of each to see whether you have community property or community income.

On page 8:

Community Property Laws Disregarded

The following discussions are situations where special rules apply to community property and community income for spouses. These rules don't apply to registered domestic partners.

Certain community income not treated as community income by one spouse. Community property laws may not apply to an item of community income that you received but didn't treat as community income. You are responsible for reporting all of that income item if:

  1. You treat the item as if only you are entitled to the income, and
  2. You don't notify your spouse of the nature and amount of the income by the due date for filing the return (including extensions).

Relief from liability for tax attributable to an item of community income. You aren't responsible for the tax relating to an omitted item of community income if all the following conditions are met.

  1. You didn't file a joint return for the tax year.
  2. You didn't include the item of community income in gross income.
  3. The item of community income you didn't include in your gross income is one of the following.
    a. Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee.
    b. Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor.
    c. Your spouse's (or former spouse's) distributive share of partnership income.
    d. Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Use the appropriate community property law to determine what is separate property.
    e. Any other income that belongs to your spouse (or former spouse) under community property law.
  4. You establish that you didn't know of, and had no reason to know of, that community income.
  5. Under all facts and circumstances, it wouldn't be fair to include the item of community income in your gross income.

Requesting relief. For information on how and when to request relief from liabilities arising from community property laws, see Community Property Laws in Pub. 971, Innocent Spouse Relief.

Equitable relief. If you don't qualify for the relief discussed earlier under Relief from liability for tax attributable to an item of community income and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief. To request equitable relief, you must file Form 8857, Request for Innocent Spouse Relief. Also see Pub. 971.

Spousal agreements. In some states, a married couple may enter into an agreement that affects the status of property or income as community or separate property. Check your state law to determine how it affects you.

Nonresident alien spouse. If you are a U.S. citizen or resident alien and you choose to treat your nonresident alien spouse as a U.S. resident for tax purposes and you are domiciled in a community property state or country, use the community property rules. You must file a joint return for the year you make the choice. You can file separate returns in later years. For details on making this choice, see Pub. 519, U.S. Tax Guide for Aliens.

If you are a U.S. citizen or resident alien and don't choose to treat your nonresident alien spouse as a U.S. resident for tax purposes, treat your community income as explained next under Spouses living apart all year. However, you don't have to meet the four conditions discussed there.

Spouses living apart all year. If you are married at any time during the calendar year, special rules apply for reporting certain community income. You must meet all the following conditions for these special rules to apply.

  1. You and your spouse lived apart all year.
  2. You and your spouse didn't file a joint return for a tax year beginning or ending in the calendar year.
  3. You and/or your spouse had earned income for the calendar year that is community income.
  4. You and your spouse haven't transferred, directly or indirectly, any of the earned income in condition (3) above between yourselves before the end of the year. Don't take into account transfers satisfying child support obligations or transfers of very small amounts or value.

If all these conditions are met, you and your spouse must report your community income as discussed next. See also Certain community income not treated as community income by one spouse, earlier.

Earned income. Treat earned income that isn't trade or business or partnership income as the income of the spouse who performed the services to earn the income. Earned income is wages, salaries, professional fees, and other pay for personal services.

Earned income doesn't include amounts paid by a corporation that are a distribution of earnings and profits rather than a reasonable allowance for personal services rendered.

Trade or business income. Treat income and related deductions from a trade or business that isn't a partnership as those of the spouse carrying on the trade or business.

Partnership income or loss. Treat income or loss from a trade or business carried on by a partnership as the income or loss of the spouse who is the partner.

Separate property income. Treat income from the separate property of one spouse as the income of that spouse.

Social security benefits. Treat social security and equivalent railroad retirement benefits as the income of the spouse who receives the benefits.

Other income. Treat all other community income, such as dividends, interest, rents, royalties, or gains, as provided under your state's community property law.

Other separated spouses. If you and your spouse are separated but don't meet the four conditions discussed earlier under Spouses living apart all year, you must treat your income according to the laws of your state. In some states, income earned after separation but before a decree of divorce continues to be community income. In other states, it is separate income.

On page 9:

End of the Community

The marital community may end in several ways. When the marital community ends, the community assets (money and property) are divided between the spouses. Similarly, a registered domestic partnership may end in several ways and the community assets must be divided between the registered domestic partners.

Death of spouse. If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in your spouse's gross estate, whether or not the estate must file a return (this rule doesn't apply to registered domestic partners).

Example. Bob and Ann owned community property that had a basis of $80,000. When Bob died, his and Ann's community property had an FMV of $100,000. One-half of the FMV of their community interest was includible in Bob's estate. The basis of Ann's half of the property is $50,000 after Bob died (half of the $100,000 FMV). The basis of the other half to Bob's heirs is also $50,000.

For more information about the basis of assets, see Pub. 551, Basis of Assets.

Divorce or separation. . If spouses divorce or separate, the (equal or unequal) division of community property in connection with the divorce or property settlement doesn't result in a gain or loss. For registered domestic partners, an unequal division of community property in a property settlement may result in a gain or loss. For information on the tax consequences of the division of property under a property settlement or divorce decree, see Pub. 504.

Each spouse (or each registered domestic partner) is taxed on half the community income for the part of the year before the community ends. However, see Spouses living apart all year, earlier. Any income received after the community ends is separate income. This separate income is taxable only to the spouse (or the registered domestic partner) to whom it belongs.

An absolute decree of divorce or annulment ends the marital community in all community property states. A decree of annulment, even though it holds that no valid marriage ever existed, usually doesn't nullify community property rights arising during the “marriage.” However, you should check your state law for exceptions.

A decree of legal separation or of separate maintenance may or may not end the marital community. The court issuing the decree may terminate the marital community and divide the property between the spouses.

A separation agreement may divide the community property between you and your spouse. It may provide that this property, along with future earnings and property acquired, will be separate property. This agreement may end the community.

In some states, the marital community ends when the spouses permanently separate, even if there is no formal agreement. Check your state law.

If you are a registered domestic partner, you should check your state law to determine when the community ends.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.