The Community Property States
Community property law dictates that anything acquired during the course of a marriage is owned equally by both spouses, with the exception of assets or income that are received as inheritances or that are otherwise gifted to just one spouse. The states that recognize community property law as of 2022 are:
ArizonaCaliforniaIdahoLouisianaNew MexicoNevadaTexasWashingtonWisconsin
Federal law doesn’t distinguish between same-sex couples and opposite-sex married couples, but it does draw a line between registered domestic partnerships or civil unions and marriages. Federal law doesn’t recognize domestic partnerships or civil unions as marriages for tax purposes.
Community Income and Property
By law, community income is considered to be equally shared by a married couple, regardless of who earns it. Community income also includes income generated by such community property. Community property is that which is acquired while married and while the couple resides in a community property state (or one that allows election of that arrangement). The property can’t be otherwise identified as separate property.
Separate Income and Property
Separate income is that which is considered by law to belong to one spouse or the other. This might be because it’s produced or earned by property that was owned separately prior to marriage, property bought with separate funds, or property that both spouses have agreed to convert from community property to separate property through a legally valid spousal agreement. This process is referred to as “transmutation.” Each spouse would report one half of the total community income, plus their own separate income, if any, when they’re preparing a separate federal tax return. This rule can vary somewhat by state, however. Income generated by separate property is still considered community income in Idaho, Louisiana, Wisconsin, and Texas, so the only income that would be classified as separate income in these jurisdictions would be distributions from an individual retirement account (IRA), Social Security benefits, or alimony. By contrast, income from separate property is considered to be separate income in Arizona, Nevada, New Mexico, and Washington.
Reporting Earned Income
Compensation in the form of wages, salaries, commissions, and self-employment is always treated as income belonging to the marital community in a community property state. Each spouse would report one half of the total compensation income and one half of the withholding from that compensation income when filing a separate federal tax return.
Reporting Investment Income
Interest, dividends, rent, capital gains, and other income from investments might be classified as either community or separate income. It depends on the character of the property that’s generating the income. Income earned by separate property is separate income. It would be community income if the property were community property. It would be allocated as community property in the same proportion as the underlying community property when there’s a mix of separate and community property.
Retirement and Pension Income
Income from IRAs and IRA-based plans, such as SEP-IRAs and SIMPLE-IRAs, is always separate income and is allocated to the spouse who owns the account. Similarly, Social Security benefits are always separate income and are allocated to the spouse who receives the benefits. Income from 401(k) plans, 403(b) plans, and other types of pensions can be a mix of separate and community income. Distributions from a retirement plan other than an IRA are characterized depending on the respective periods of participation in the pension while a couple is married and living in a community property state. The ratio is based on the time you were participating in the retirement plan or pension.
