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Advantages & Disadvantages of Filing Separately Vs. Jointly in a Community Property State

There are nine community property states in the U.S. – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, anything that you and your spouse or domestic partner earn or acquire during the course of a relationship belongs to both of you, including salaries. Ultimately, the question of whether it makes more sense to file singly or jointly in a community property state comes down to the specifics of your situation.

  1. Joint Filing Advantages

    • Numerous advantages exist to jointly filing taxes in a community property state. According to the state of California Tax Information Center, couples filing jointly in community property states usually pay less in taxes than if filing separately. This arises from the fact that filing jointly allows for the inclusion of a number of deductions, such as dependent children, student loan interest credits and the earned income tax credits, that filing separately disallows you from claiming.

    Joint Filing Disadvantages

    • The primary disadvantage to filing jointly in community property states arises from liability. In such states, both partners hold liability for all issues relating to a community property on a tax return. For instance, if your spouse doesn’t report some income earned from the sale of stocks purchased during the marriage, you hold liability for tax evasion because these stocks constitute common property. Likewise, in some community property states – Wisconsin, for instance – the government may offset your tax return for debts owed. If your spouse owes a debt to the government, the debt comes out of your collected tax return, not your spouse’s portion of the return.

    Separate Filing Advantages

    • Few advantages exist to filing separate returns in community property states for spouses or domestic partners. As Stephen Fishman writes in his book “Lower Taxes in Seven Easy Steps,” this only makes financial sense if one partner pays almost all household expenses permissible for deduction when filing separately, such as medical expenses. Deducting all of these items from a separate return provides greater tax relief than deducting them from a joint return. However, the restrictions on deductions for separate returns may negate the value of doing this. Separate filing may protect you from liability issues.

    Separate Filing Disadvantages

    • Several disadvantages pertain to filing separate returns in community property states. These states require you to divide salaries evenly for separate tax returns. For instance, if one spouse earned $75,000 in a year and the other earned $25,000, each spouse must file a return citing $50,000 earned. The spouse who earned $25,000 pays taxes on twice his earnings in this instance. Furthermore, filing separately disallows you from claiming numerous deductions, particularly those on losses from real estate ventures or long-term capital losses. The authors of “1040 Preparation and Planning Guide” further point out that in most states, those married and filing separately pay the highest tax rates per bracket of anyone, irrespective of community property status.

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