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.

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Community Property Laws Disregarded

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

Certain community income. Community property laws do not apply to an item of community income and 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 do not file a joint 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. 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.

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:

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.