California Community Property Tax Issues
California is a community property state.
The State of California has some unique tax issues in regard to community property. The following are some special issues related to community income in the Golden State.
When Does the Community End in California?
To end a community in California does not necessarily require the couple to be legally separated or have filed for separation or divorce. The community ends when the couple separates with no intention of reuniting and is based upon the “facts and circumstances” of the situation.
Living Under the Same Roof
On July 25, 2016, Governor Brown signed SB 1255, which reverses a Supreme Court ruling (Davis 2/20/15), and effective January 1, 2017, defines the date of separation so that taxpayers may “separate” while continuing to live under the same roof. CAUTION: this law does not change the “lived apart” rule for someone still married to claim head of household filing status.
“ IRM 25.18.1.3.4(5) - Physical Separation (03-04-2011)- California and Washington hold that the community property estate is terminated when spouses physically separate and both spouses intend to permanently end the marriage. This mutual intent must be established through the actions and conduct of the spouses. This requires an examination of the facts and circumstances of each case, with the burden of proof on the party asserting that the community property estate was terminated. Siezer v. Sessions, 132 Wash. 2d 642, 940 P.2d 261 (1997), citing Wash. Rev. Code § 26.16.140; In re Marriage of Hardin, 38 Cal. App. 4th 448, 45 Cal. Reptr. 2d 308 (Ct. App. 1995), citing Cal. Fam. Code § 771. In these states, the Service should continue to apply community property laws to separated spouses unless both spouses have affirmatively alleged that they do not intend to resume the marriage and community property rules do not apply, and their conduct supports this. ”
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If the clients do not have a written affirmation of separation or a legal state termination of the relationship, then this is where you should suggest the partners consult with an attorney to draw up a written document meeting the IRM’s requirements.
Earned Income (Income from Personal Services)
Income from personal services is governed by the laws of the state of the owner’s “domicile”. For a California domiciled taxpayer income from personal services is considered community property.
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Earned in CA, domiciled in a non-community property state - Earnings in CA by a taxpayer domiciled in a non-community property state would NOT be community income.,
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Domiciled in a non-community property state, married to a spouse domiciled in CA ,– Where a spouse is a resident and domiciled in another state, the status of that spouse’s earnings as either separate or community are determined by the laws of the other state.
“ Wife was domiciled in WA but a resident of CA and husband was resident of and domiciled in WA – since WA is a community property state, ½ of his wages were reportable to CA.(Appeal of George F. and Magdalena Herrman, 8/6/1962, 62-SBE-041) ”
- BOE Decision
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Change of Domicile Before Tax Return's Due - A spouse's income from separate property in a noncommunity state remains separate property even though the spouses change their domicile to CA before the tax return's due date. (Klise (1928) 10 BTA 1234, acq.)
Deductions
Otherwise allowable deductions paid out of community income are generally deductible one-half by each spouse. Liabilities arising against the spouse of the taxpayer while the couple was domiciled in a non-community property state, and settled while they were domiciled in California, were not deductible one half by the taxpayer spouse (Zukor, Lottie, (1941) 43 BTA 825).