Married filing separately works differently in a community property state. Under state law, most income and assets acquired during the marriage belong to both spouses equally. So even when you file separate returns, each spouse usually reports half of the community income. This guide explains how to manage your assets and taxes in that situation.
How married filing separately works in community property states
Nine states follow community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, property and income acquired during the marriage generally belong to both spouses equally.
As a result, spouses who file separately must each report half of their combined community income. In addition, they generally split deductions for expenses paid with community funds. On the other hand, income and expenses tied to separate property follow the spouse who owns it. For the federal rules, see IRS Publication 555, Community Property.
Strategies for managing assets when married filing separately
Define your separate property
First, identify assets you owned before marriage or received as gifts or inheritances. These are usually separate property. However, mixing them with community funds can blur the line. So keep good records and hold separate assets in separate accounts.
Learn your state’s rules
Each community property state has its own details. For example, states differ on how they treat income from separate property. Check your state tax agency’s guidance, or work with a tax professional who knows your state.
Coordinate deductions
Deductions tied to community property, such as mortgage interest and property taxes, are generally split between spouses. Also, if one spouse itemizes, the other must itemize too. So agree on your approach before you file.
Consider a marital property agreement
If you want to manage some assets on your own, a prenuptial or postnuptial agreement may help. Such an agreement can define separate property and change how future income is treated. However, have an attorney prepare it, since state rules vary.
Review retirement contributions
Because earnings are usually community income, both spouses may have an interest in retirement accounts funded during the marriage. Therefore, review contribution limits and deduction rules for each spouse’s separate return.
Plan your investments
Income from community investments is generally split equally. By contrast, new investments bought only with separate funds may stay separate. With careful planning, you can keep the two apart.
Keep communication open
Filing separately in a community property state takes teamwork. Both spouses need the same numbers to report income and deductions correctly. So review your finances together regularly, and make major decisions jointly.
Get help with married filing separately
Separate returns in a community property state are easy to get wrong. We help couples allocate income and deductions correctly. To discuss your situation, call (415) 842-2940 or book a free 15-minute call.