There are multiple miscellaneous tax issues that can impact community property. These include prenups, gifts of community property, and other situations. Learn more below.

Effect of Prenuptial and Postnuptial Agreements - Taxpayers can, with a prenuptial or postnuptial (also termed pre- and post-marital) agreement, opt out of state community property laws and elect to have income treated as if they were domiciled in a non-community property state, in which case IRC § 66 would not apply. (Internal Revenue Manual, 25.15.5.3 (7-24-2017); 25.18.1.3.25 (6-6-2017))

Separate Maintenance – A decree of divorce or separate maintenance ends the community and makes later earnings separate property. However, an interest in a community property may not end where there is no division or settlement of property (Hunt, (1954) 22TC 228). In spite of a separate maintenance agreement, the parties’ subsequent actions such as commingling funds could cause income to be community income.

Additional Medicare Tax – Married taxpayers filing separately who reside in a community property state must compute their additional Medicare tax based on each spouse’s own wages or self-employment income.

Non-Resident Alien Spouse - The compensation of a U.S. citizen or resident alien, domiciled in a U.S. community property state, married to a nonresident alien retains its character as compensation for personal services derived from sources within the U.S. and taxable to the U.S. (Rev Rul 66-239).

No Relief from Community Property Available - A requesting spouse isn't entitled to relief from the federal income tax liability resulting from the operation of the community property rules under any of the four exceptions provided by Code Sec. 66 for any tax year:

Gifts of Community Property - Gifts of community property to a third party are generally considered to have been made one half by each spouse.

Entities Owned by Husband and Wife as Community Property - Rev Proc 2002-69 - The classification of an unincorporated business entity depends in part on the number of its members or owners. A business entity with only one owner may be classified for tax purposes as a corporation or its entity status may be disregarded. If the entity is disregarded, the activity is treated as a sole proprietorship. A business entity with two or more owners is classified as either a corporation or a partnership.

Rev Proc 2002-69: If a qualified entity and the husband and wife as community property owners treat the entity as a disregarded entity for tax purposes, IRS will accept the position that the entity is a disregarded entity. If a qualified entity and the husband and wife as community property owners treat the entity as a partnership for tax purposes and file the appropriate partnership returns, IRS will accept the position that the entity is a partnership. For this purpose, a business entity is a qualified entity if:

A change in reporting position will be treated for tax purposes as a conversion of the entity.

Inherited Community Property - Code Sec. 1014(b)(6) - Where a spouse dies owning community property and at least one-half of the entire community interest is includible in the deceased spouse's gross estate (whether or not an estate tax return is required or an estate tax is payable), the surviving spouse's interest is treated as property acquired from a decedent. Accordingly, the basis of the community property inherited by the surviving spouse gets a full step up or step down to fair market value as of the decedent’s date of death (or alternate valuation date, if applicable), with some exceptions if the deceased spouse died in 2010.

Military Combat Zone Compensation - Reg § 1.112-1(d) - In the case of a husband and wife domiciled in a State recognized for Federal income tax purposes as a community property State, any exclusion for Combat Zone

Compensation of a member of the armed services operates before apportionment of the gross income of the spouses under community law. For example, a husband and wife are domiciled in a community State and the member spouse is entitled, as a commissioned officer, to the benefit of the exclusion under section 112(b) of $500 for each month*. The member receives $7,899 as compensation for active service for 3 months in a combat zone. Of that amount, $1,500 is excluded from gross income under section 112(b) and $6,399 is taken into account in determining the gross income of both spouses.

*The $500 per month exclusion was changed, effective Nov. 21, 1995 (see Chapter 1.08), but the monetary amounts in this example from the regulation have not been revised.

Married to a Nonresident Alien - Reg § 1.879-1 - Community income for this purpose includes all gross income, whether derived from sources within or without the United States, which is treated as community income of the spouses under the community property laws of the State, foreign country, or possession of the United States in which the recipient of the income is domiciled. Income from real property also may be community income if so treated under the laws of the jurisdiction in which the real property is located. Generally the following rules apply:

Multiple Support Agreements in Community Property States - Compensation earned by one spouse in a community property state is community income. This means for example, that half of the funds earned by the husband and used for another’s support are considered to be support furnished by the wife. (Rev Rul 61-52).