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In a separate property state, the computations for the married-separate filing
is fairly simple in that you would report only your own income and deductions
on your separate return. If you do have joint assets with your spouse, special
consideration must be given to how those assets are split.
But in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, and WI),
generally all earnings, while married, are considered "joint," even if they
are deposited into separate accounts. Assets purchased with joint funds may
also be considered "community" assets if they are purchased with community
funds. Therefore, in these states it is much more difficult to identify
"separate" property.
As noted above, if you file a separate income tax return, you would report
only your own income, deductions, exemptions, and credits on your separate
return. But if you live in a community property state, this means you and
your spouse must each report half of your combined community income and
deductions, in addition to your separate income and deductions. The
way you figure these amounts is affected by the community property rules
of your state. Federal income tax law recognizes these rules for tax reporting
purposes.
You must first determine whether your income is community income or separate
income, as determined under the laws of the state where you live. This
classification is important because if you file a separate return, only half
the community income is reported on your return while all of your separate
income must be included on the return.
Generally, community income is all income from community property (also
determined under state law), as well as salaries, wages, and other pay for
the services of either or both spouses during their marriage. Generally,
income from a spouse's separate property (as determined under state law)
is the separate income of that spouse. For those of you who live in Idaho,
Louisiana, Texas, and Wisconsin, you must be aware that income from most
separate property is treated as community income.
Whether income from real property is community income or separate income
depends upon the laws of the state where the property is located. If you
and your spouse bought property during your marriage with both community
funds and separate funds, income from the property would be partly community
income and partly separate income.
Gains and losses from property are characterized as separate or community
depending on whether the property producing the the gain or loss is separate
property or community property. Thus, a casualty loss to your community property
home would be deductible half by each spouse.
The way you split other deductions generally depends on whether the expenses
relate to community or separate income. Deductions for expenses incurred
to earn or produce community business or investment income would be divided
equally between you and your spouse. Deductions for expenses relating to
separate business or investment income would be deductible by the spouse
who is taxable on the income. Itemized deductions, such as charitable
contributions or medical expenses, are generally considered paid from community
funds and deductible half by each spouse, unless it can be shown that they
were actually paid from separate funds, in which case they would be deductible
by the spouse who paid them.
Identifying your community and separate income and deductions according to
the laws of your state is a very complicated task. This is why untrained
people who try to use the married-separate filing status many times find
themselves on the wrong side of the tax laws and regulations. Therefore,
before you try to file that return using the married-separate status, your
MINIMUM required reading should be IRS Publications 504 and 555 at the
IRS website. The time you spend
now may well save you a bunch of hassles down the line.