Tax Tip – Tax Treatments of Community Property & Income

Generally, community property is property:

(1) that the taxpayer, the taxpayer’s spouse, or both acquire during marriage while the both are domiciled in a community property state;

(2) that the taxpayer and the taxpayer’s spouse agreed to convert from separate to community property;

(3) that cannot be identified as separate property; and

(4) real estate that is treated as community property under the laws of the state where the property is located.

Generally, community income is income from:

(1) community property; and

(2) salaries, wages, and other pay received for the services performed by the taxpayer, the taxpayer’s spouse, or both during the marriage.

Generally, married individuals that live in a community property state and do not file a joint return must report half of the total community income earned by the spouses during the tax year (Reg. Sec. 1.66-1(a)). However, there is an exception when one of the following applies:

(1) The spouses live apart and meet the qualifications.

(2) The IRS denies a spouse the federal income tax benefits resulting from community property law because that spouse acted as if solely entitled to the income and failed to notify his or her spouse of the nature and amount of the income before the due date for the filing of his or her spouse’s return.

(3) A requesting spouse qualifies for traditional relief from the federal income tax liability resulting from the operation of community property law.

(4) A requesting spouse qualifies for equitable relief from the federal income tax liability resulting from the operation of community property law (Reg. Sec. 1.66-1(a)).

Additional Tax Tip:

These rules do not apply to income from property that was formerly community property but, in accordance with state law, has stopped being community property (e.g., it became separate property or property held by joint tenancy or tenancy in common) (Reg. Sec. 1.66-1(b)).

The community property rules under Code Sec. 66 do not negate liability that arises under the operation of other laws. Therefore, a spouse who is not subject to federal income tax on community income may nevertheless remain liable for the unpaid tax (including additions to tax, penalties, and interest) to the extent provided by federal or state transferee liability or property laws (other than community property laws) (Reg. Sec. 1.66-1(c)).

Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email if you have any questions or would like additional information.

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This blog post is intended to serve solely as an aid in continuing tax education for Don Fitch Accountancy blog, podcast, and/or email members. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any federal tax, accounting opinion, tax return position, and must be supplemented for such purposes with other current authoritative materials. The information in this blog post has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Don Fitch Accountancy is not engaged in rendering legal or other professional services and will not be held liable for any actions or suits based on this blog post, podcast, and/or email, or comments made during the above presentation. If legal advice or other expert assistance is required, seek the services of a competent professional.

(Updated 02/25/2021 05:54)

Published by Don Fitch, CPA

Offers in Compromise, Wage Levy Releases, Installment Agreements, IRS Audits, and much more IRS assistance. Also, allow us to Help you complete your Tax Returns from 1913 to present (100+ Years) and for any of the 50 States.

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