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Introduction

This publication is for married taxpayers who are domiciled in one of the following community property states:

• Arizona,
• California,
• Idaho,
• Louisiana,
• Nevada,
• New Mexico,
• Texas,
• Washington, or
• Wisconsin.

This publication does not address the federal tax treatment of income or property subject to the community property election under Alaska state laws.

Community property laws affect how you figure your income on your federal income tax return if you are married, live in a community property state or country, and file separate returns. Your tax usually will be less by filing a joint return if you are married. Sometimes it can be to your advantage to file separate returns. If you and your spouse file separate returns, you have to determine your community income and your separate income.

Community property laws also affect your basis in property you inherit from a married person who lived in a community property state. See Death of spouse, later.

Useful Items You may want to see:

Publication

• 504   Divorced or Separated Individuals
• 505   Tax Withholding and Estimated Tax
• 971   Innocent Spouse Relief (And Separation of Liability and Equitable Relief)

See How To Get Tax Help near the end of this publication for information about getting these publications.

Domicile

Whether you have community property and community income depends on the state where you are domiciled. If you and your spouse have different domiciles, check the laws of each to see whether you have community property or community income.

You have only one domicile even if you have more than one home. Your domicile is a permanent legal home that you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. The question of your domicile is mainly a matter of your intention as indicated by your actions. You must be able to show with facts that you intend a given place or state to be your permanent home. If you move into or out of a community property state during the year, you may or may not have community income.

Factors considered in determining domicile include:

• Where you pay state income tax,
• Where you vote,
• Location of property you own,
• Your citizenship,
• Length of residence, and
• Business and social ties to the community.

Amount of time spent.   The amount of time spent in one place does not always explain the difference between home and domicile. A temporary home or residence may continue for months or years while a domicile may be established the first moment you occupy the property. Your intent is the determining factor in proving where you have your domicile.

Note. When this publication refers to where you live, it means your domicile.

Community or Separate Property and Income

The laws of the state in which you are domiciled generally govern whether you have community property and community income or separate property and separate income for federal tax purposes. Table 1 summarizes the general rules.

Community Property Laws Disregarded

The following discussions are situations where special rules apply to community property.

Certain community income.   Community property laws may not apply to an item of community income. You are responsible for reporting all of it if:

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

Relief from separate return liability for community income.   You are not responsible for reporting an item of community income if all the following conditions exist.

• You file a separate return for the tax year.
• You do not include an item of community income in gross income on your separate return.
• You establish that you did not know of, and had no reason to know of, that community income.
• Under all facts and circumstances, it would not be fair to include the item of community income in your gross income.

Equitable relief.   If you were married and filed a separate return in a community property state and are now liable for an underpayment or understatement of tax you believe should belong only to your spouse (or former spouse), you may request equitable relief. To request equitable relief, you must file Form 8857, Request for Innocent Spouse Relief, or other similar statement. Also see Publication 971.

Spousal agreements.   In some states a husband and wife 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 United States citizen or resident 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 Publication 519, U.S. Tax Guide for Aliens.

If you are a U.S. citizen or resident and do not 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 do not have to meet the four conditions discussed there.

Table 1. General Rules - Property and Income: Community or Separate?

Community property is property: That you, your spouse, or both acquire during your marriage while you are domiciled in a community property state. (Includes the part of property bought with community property funds if part was bought with community funds and part with separate funds.) That you and your spouse agreed to convert from separate to community property. That cannot be identified as separate property.

Separate property is: Property that you or your spouse owned separately before marriage. Money earned while domiciled in a noncommunity property state. Property either of you were given or inherited separately after marriage. Property bought with separate funds, or exchanged for separate property, during the marriage. Property that you and your spouse agreed to convert from community to separate property in an agreement valid under state law. The part of property bought with separate funds, if part was bought with community funds and part with separate funds.

Community income 1,2 is income from: Community property. Salaries, wages, or pay for services of you, your spouse, or both during your marriage. Real estate that is treated as community property under the laws of the state where the property is located.

Separate income 1,2 is income from: Separate property. Separate income belongs to the spouse who owns the property.

1 Caution: In Idaho, Louisiana, Texas, and Wisconsin, income from most separate property is community income.

2 Caution: Check your state law if you are separated but do not meet the conditions discussed in Spouses living apart all year. In some states, the income you earn after you are separated and before a divorce decree is issued continues to be community income. In other states, it is separate income.

General Rules - Property and Income: Community or Separate?

Table 1. General Rules - Property and Income: Community or Separate?

Community property is property: That you, your spouse, or both acquire during your marriage while you are domiciled in a community property state. (Includes the part of property bought with community property funds if part was bought with community funds and part with separate funds.) That you and your spouse agreed to convert from separate to community property. That cannot be identified as separate property.

Separate property is: Property that you or your spouse owned separately before marriage. Money earned while domiciled in a noncommunity property state. Property either of you were given or inherited separately after marriage. Property bought with separate funds, or exchanged for separate property, during the marriage. Property that you and your spouse agreed to convert from community to separate property in an agreement valid under state law. The part of property bought with separate funds, if part was bought with community funds and part with separate funds.

Community income 1,2 is income from: Community property. Salaries, wages, or pay for services of you, your spouse, or both during your marriage. Real estate that is treated as community property under the laws of the state where the property is located.

Separate income 1,2 is income from: Separate property. Separate income belongs to the spouse who owns the property.

1 Caution: In Idaho, Louisiana, Texas, and Wisconsin, income from most separate property is community income.

2 Caution: Check your state law if you are separated but do not meet the conditions discussed in Spouses living apart all year. In some states, the income you earn after you are separated and before a divorce decree is issued continues to be community income. In other states, it is separate income.

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 did not 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 did not transfer, directly or indirectly, any of the earned income in (3) between yourselves before the end of the year. Do not take into account transfers of very small amounts or value. Also, do not take into account a payment or transfer to or for your dependent child, even though the payment or transfer satisfies an obligation of support imposed on your spouse.

If all these conditions are met, you and your spouse must report your community income as discussed next. See also Certain community income, earlier.

Earned income.   Treat earned income that is not trade or business or partnership income as the income of the spouse who performed the services. Earned income means wages, salaries, professional fees, and other pay for personal services. Earned income does not include any social security or social security equivalent of tier 1 railroad retirement benefits you receive during the year.

Trade or business income.   Treat income and related deductions from a trade or business that is not a partnership as those of the person 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 investment income from the separate property of one spouse as the income of that spouse.

Social security benefits.   Treat social security benefits received during the year, including the social security equivalent portion of tier 1 railroad retirement benefits, as the separate income of the spouse who received them.

Other income.   Treat all other community income, such as dividends, interest, rents, royalties, or gains, according to the community property laws of your state or country.

Example.   Daniel and Sharon were married throughout the year but did not live together at any time during the year. Both were domiciled in Texas, a community property state. They did not file a joint return or transfer any earned income between themselves. During the year their incomes were as follows:

			Daniel	Sharon
Wages			$20,000	$22,000
Consulting business fees			5,000
Partnership income				10,000
Dividends from separate property			1,000	2,000
Interest from community property			500	500
Total			$26,500	$34,500

Under Texas community property laws, all of Daniel and Sharon's income is considered community income. Sharon did not take part in Daniel's consulting business.

Ordinarily, Daniel and Sharon would each report half the total community income, $30,500 [($26,500 + $34,500) ÷ 2], on their separate returns. But because they meet the four conditions discussed earlier, they must disregard community property law when reporting their income, except the interest from community property. They should report on their separate returns only their own earnings and other income and their share of the interest from community property. Daniel reports $26,500 and Sharon reports $34,500.

End of the Marital 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.

Death of spouse.   In community property states, each spouse usually is considered to own half the estate (excluding separate property). If 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.

For 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. At least half their community interest was includible in Bob's estate. The basis of Ann's half of the property is $50,000 after Bob died (one 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 Publication 551, Basis of Assets.

Divorce or separation.   The division of community property in connection with a divorce or property settlement does not result in a gain or loss. For information on the tax consequences of the division of community property under a property settlement or divorce decree, see Publication 504.

Each spouse 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 marital community ends is separate income. This separate income is taxable only to the spouse 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 does not nullify community property rights arising during the so-called marriage. Check your state law.

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

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. Such an agreement may end the community. In some states, the marital community ends when the husband and wife permanently separate, even if there is no formal agreement. Check your state law.

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