Married taxpayers in community property states generally do not need to think about community property laws when filing their federal tax returns. However, the issue can complicate tax filings for married taxpayers who file separate returns. The basic tax forms are the same ones used by joint filers, but they do need to be filled out differently.
Basic Federal Tax Forms
Either the 1040 or the 1040A tax forms can be used to file separate returns, regardless of community property issues. The 1040-EZ form cannot be used to file married-filing-separately.
Generally, form 1040A is used by taxpayers claiming the standard deduction, with form 1040 being used by taxpayers claiming itemized deductions. The trick with separate returns, whether or not community property is at issue, is that if one spouse itemizes deductions, the other must also itemize. It is a good idea to settle this before filing. Otherwise, one of you may receive a notice from the Internal Revenue Service requiring an amended return.
Allocation of Community Income
The major difference between regular separate returns and community property separate returns is that any community income earned or received by either spouse must be allocated between the two returns. Community property laws differ somewhat from state to state, but community income generally includes salary, wage and business income, as well as rents and investment income from community property. This means, for example, that your tax return should only report one half of your W-2 income, with the other half appearing on your spouse's return. Similarly, you must report one half of your spouse's W-2 income on your own return. Many deductions and business expenses also must be allocated, but see Publication 555 for exceptions. Any separate income -- e.g., from separately-owned investments -- must be fully reported on the return of whichever spouse owns the property.
Allocation Worksheet or Other Supporting Documents
Because it is IRS policy to match information on W-2s and 1099s with taxpayer returns based on Social Security numbers, the allocation of community income does require some additional paperwork to be filed with your return. The best method is to attach a worksheet detailing the allocations. The "Allocation Worksheet" in IRS Publication 555 (or any similar worksheet) can be used for this. Note that including your spouse's Social Security number on the worksheet can result in faster IRS processing of your return. An alternative to filing the worksheet with your return is to attach copies of your spouse's tax documents (W-2s, 1099s, etc.) to your own return.
Rules for Spouses Living Apart
There is an exception to the income allocation rule for some spouses who live apart for the whole tax year and who maintain separate finances. Spouses falling under this exception are required to treat earned income (W-2 and some 1099-MISC income) as separate income, even if it is considered community income under state law. In this case, the earned income should not be allocated between the returns. Community income from property does still need to be allocated. Check all the requirements in Publication 555 to see whether this exception applies to you.
Guidelines for Spouses Who Are Not Communicating
Income allocation is all well and good if you and your spouse are communicating. Unfortunately, this is not always the case for couples who are filing separately. For your part, if you have community income (e.g., wages) that you treat completely as your own and if you do not tell your spouse about the type and amount of this income before the tax filing deadline, you are responsible for reporting the full amount of the income on your own return and for paying the full amount of taxes due on that income.
Similarly, if your spouse does not share or properly inform you of his community income, you may not be liable for the taxes on that income if he fails to fully report the income on his return or fails to pay any amount owed. If this issue arises, you will need to meet several requirements detailed in Publication 555 to avoid liability. If the IRS attempts to collect your spouse's tax debt from you, and you do not believe you should be responsible for that debt, request "innocent spouse relief" by filing Form 8379.
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