Spouses who live in one of the nine community property states must classify their income as community income or separate income when filing separate federal income tax returns. In general, you should follow your state's laws to determine if a particular source of income is separate or community property, as the IRS generally refers to each state's community property rules.
The community property states
The Community Property Act states that anything acquired during a marriage is the equal property of both spouses, except for property or income inherited or otherwise attributed to only one spouse.
The states that recognize community property rights as of the 2022 tax year are:
Washington, Arizona, California, New Mexico, Nevada, Idaho, Louisiana, Texas, and Wisconsin
Federal law does not distinguish between same-sex and opposite-sex married couples but draws a line between domestic or registered civil unions and marriages. Federal law does not recognize civil partnerships or unions as marriages for tax purposes.
Note: The community property laws of each state are not necessarily the same. States often bring their unique twist to certain arrangements.
Community Income and Property
Community income is considered to be shared equally by a couple, regardless of who receives it. Community income also includes income generated by these community assets.
Community properties are those acquired during the marriage and while the couple lives in a community state (or which allows the choice of such arrangement). The property cannot otherwise be identified as a separate property.
Separate Income and Property
Separate income is what the law considers to belong to a spouse. This may be because it is produced or acquired on property that was separate property before the marriage, property acquired with separate trusts or property that both spouses agreed to convert from joint property to separate property through a legally valid marriage contract. This process is known as "transmutation."
Each spouse would report half of the total community income, plus separate income, if any when filing a separate federal income tax return.
Note: Separate income is income generated by the separate property. There are special rules for allowances and retirement income.
However, this rule may vary slightly from state to state. The income held separately is still considered community income in Texas, Idaho, Wisconsin, and Louisiana, so the only income that is classified as separate income in those jurisdictions would be distributions from an Individual Retirement Account. (IRA), Social Security benefits or child support.
In contrast, separate property income is considered separate income in New Mexico, Arizona, Nevada, and Washington.
Reporting Earned Income
Compensation in the form of salaries, wages, commissions, and self-employment is always treated as income of the spouse in a marital community in a community property state. Each spouse would report half of the total compensatory income and half of the withholding of that compensatory income when filing a separate federal income tax return.
Reporting Investment Income
Interest, dividends, rents, capital gains, and other investment income can be classified as separate or community income. It depends on the nature of the income-generating property.
Separate property income is separate income. It would have counted as community income if the community owned the property. It would be assigned as community property in the same proportion as the underlying community property where there is a combination of community and separate property.
Retirement Income
Retirement income from IRAs and IRA-based plans such as SIMPLE-IRAs and SEP-IRAs are always separate income and attributable to the spouse who owns the account. Similarly, social security benefits are always a separate income and are attributed to the spouse who receives them.
Income from 401(k), 403(b) plans, and other types of pensions can be a combination of separate and community income. The ratio is based on the length of your participation in the retirement pension or plan. Distributions from a pension plan other than an IRA are characterized by their periods of participation in retirement while the couple is married and living together.
Note: If you receive a fixed payment from a retirement plan, you may be eligible to use an optional 10-year tax calculation method that ignores community ownership factors. Speak to a tax professional to find out if you qualify.
Are there other states that recognize community property laws?
Tennessee, Alaska, and South Dakota will allow spouses to voluntarily follow community property law beginning in 2022. The rules and regulations here apply only to the nine states with community property laws.
Is Child Support Taxable in the Community Property States?
Child support is taxable to the extent that payments exceed 50% of community income if one spouse pays child support or separate support to the other. However, this is only the case until your divorce is finalized.
Summary
Community property is a law in nine states.
Each spouse must report half earned income and half withholding tax when filing separate federal taxes in community property states.
In the case of pensions and capital income, it depends on the qualification of the level or the property which generates the income, if it is considered collectively or separately.
The IRS requires spouses in joint ownership states to report their income as joint property or separate property under their state's laws if they file separate tax returns.
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