When you prepare tax returns for
others, it is important to know which states are community property states.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington
(state) and Wisconsin are the nine community property states. This is
important because you will have tax filing situations where you must apply
the tax laws accordingly and if the state is a community property state,
this would make a huge difference in the outcome.
Whether you have community property and community income
depends on the state where you are domiciled. This means that even if
you live in one state, you may be domiciled in another state. Where you are
domicile is important to determine. If you don't determine it, the state
where you are domiciled in may come after you for their fair share.
Sometimes where you are domiciled is important at the federal level as when
you are domiciled in the United States but you live in another country. If
you lived in another country but you hold your driver's license, bank
accounts, home and practically everything else in the United States, then
for tax purposes, you live in the United States. This is quite common in the
Mexican border towns where people are living on that side to save money on
rent and many other things, but they come across the border for work, school
and even their grocery shopping.
With regard to net income from a trade or business (other
than a partnership) that is community income, self employment tax is
imposed on the spouse who earned the income or the spouse who owns the
business.
Community property laws affect how you figure your income
on your federal income tax return if you are married, if you live in a
community property state or community property country and most commonly
when you file separate tax returns.
You have only one domicile even if you have more than one
home. If you move into or out of a community property state during the
year, you may or may not have community income. Your domicile may depend
on where you pay your state income tax. The location of property you own may
be a factor in determining your domicile. Additionally, consider the your
business and your social ties to the community when determining domicile.
Community property is property that you, you spouse or
both of you acquire during your marriage while you are domiciled in a
community property state. Also, community property can be property which you
and your spouse agree to convert from separate to community property.
Furthermore, if you cannot identify the property as separate property, then
you would have to consider it community property.
Alimony or separate maintenance payments made prior to
divorce are taxable to the payee spouse only to the extent they exceed
50% (his or her share) of the reportable community income. This is so
because the payee spouse is already required to report her half of the
community income on her tax return.
Gains and losses are classified as separate or community
depending on how the property is held. A loss on separate property, such
as stock held separately, is a separate loss.
To illustrate further, Henry Wright retired this year
after 30 years of civil service. He and his wife were domiciled in a
community property state during the past 15 years. If Mr. Wright receives
$1,000 per
