How to File Taxes in a Community Property State

Married people who live in one of nine community property states need to be especially careful when not filing a "married filing jointly" return.

Instructions

Difficulty: Moderately challenging

General Rules and Property

1. Determine if you and your spouse live in a community property state. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states.
2. Determine if you're filing a separate return from your spouse. Community property laws are not tax-relevant if you're filing a joint return with your spouse.
3. Be aware that when community property rules apply, you must split community property income, adjustments and deductions - 50 percent to your spouse and 50 percent to you.
4. In determining separate property, ask yourself if you owned property before the marriage. This is separate property even in a community property state.
5. Determine if you acquired property during your marriage while you lived in a non-community-property state. This remains separate property even after you move to a community property state.
6. Calculate if you had money before you were married or if you earned money during marriage while you lived in a non-community-property state. This money is considered to be separate funds.
7. Determine if you inherited or were given property or money separately from your spouse during marriage. This is separate property or separate funds.
8. Verify that, during your marriage, you purchased property using separate funds. This is separate property.

Spouses Who Lived Apart All Year

9. Determine if you lived apart from your spouse at all times during the year and if you are not filing a joint return.
10. Treat money from your earned income and your trade or business as your income alone. Don't include any income from your spouse's earned income and trade or business on your tax return.
11. Treat money from your partnership interest and income from property you own separately as your income alone. Don't include any income from your spouse's partnership interest or separately owned property on your tax return.
12. Treat your Social Security benefits as your income alone. Don't include your spouse's Social Security benefits on your tax return.
13. Treat interest, dividends and income from jointly owned property according to community property rules.
14. Treat military retirement pay and civil service retirement pay as community property income only if the two of you were married and living in a community property state at the time of military service or civil service employment. Otherwise, treat it as separate income.

Spouses Who Didn't Live Apart All Year

15. Determine if you lived with your spouse at some time during the tax year and if you are not filing a joint return.
16. Treat all money from earned income, trade or business, partnerships, dividends, interest and jointly owned property according to community property rules - splitting it fifty-fifty for the period you lived together.
17. Treat military retirement pay and civil service retirement pay as community property income only if the two of you were married and living in a community property state at the time of military service or civil service employment. Otherwise, treat it as separate income.
18. Treat income from separate property as separate income in Arizona, California, Nevada, New Mexico and Washington. Treat it as community property income in Idaho, Louisiana, Texas and Wisconsin.

Tips & Warnings

• There are situations where the combined tax for both spouses is lower under community property rules when filing married filing separately than when filing married filing jointly. It is not common. Predicting this without actually doing the returns both ways is almost impossible, even for a seasoned tax professional.
• It can be important to keep records distinguishing between separate and community property even if you don't live in a community property state and even if you think your marriage is going to last forever. You may move to a community property state, and your spouse may become intolerable someday.
• If you mingle separate funds and community funds to purchase property, a percentage of the property is considered separate property.
• If you and your spouse divorced during the year, you have to follow community property rules for that part of the year during which you were married and lived in a community property state.
• Some states apply community property rules during a legal separation, and some don't. Talk to a tax professional.
• Individual retirement accounts are not subject to community property rules.
• When your spouse has partnership income that is subject to self-employment taxes, your half of that income is not subject to self-employment taxes.
• Compute your earned income credit, if you qualify, as if there were no community property rules.
• You and your spouse are each entitled to credit for half of the tax withholdings for any income considered community property income.
• Expenses that are paid out of separate funds can be deducted by the spouse who pays them. If paid out of community funds, the expenses must be equally deducted.
• If you use the married filing separately status, you will be ineligible for certain credits and benefits, including the earned income credit and child care credit.