Special Rule Reporting Earned Income When Spouses Live Apart
When spouses live apart, the IRS provides a special tax rule for reporting earned income. If you are in this situation, you'll find all of the information you need below.
A special rule (Section 879(a)) permits spouses to allocate earned income to the spouse that earned it if they so choose. This rule was created to aid abandoned spouses but can apply in cases where ALL the following conditions are met:
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The spouses are married to each other at any time during the calendar year;
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They live apart at all times during the calendar year (Regulation Sec 1.66-2(b)).
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Taxpayers are considered living apart if they maintain separate residences.
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Spouses who maintain separate residences due to temporary absences aren't considered to be living apart.
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One or both of the spouses has earned income (the term earned income includes both profits and losses from self-employment, and pass through business entities) for the calendar year that is community income, and
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No portion of that earned income is transferred directly or indirectly between the spouses during the calendar year.
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Any amount of earned income transferred for the benefit of the spouses' child won't be treated as an indirect transfer to one spouse (Reg Sec 1.66-2(c))
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Husband's payments on the mortgage on the residence where taxpayer and their children lived, and on loans on other properties awarded to taxpayer under the divorce decree were indirect payments for the taxpayer's benefit (Lytle TC Memo 1992-185).
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Transferred income doesn't include a de minimis amount of earned income that is transferred between spouses (Reg Sec 1.66-2(c)).
CAUTION:
This special rule applies to earned income only. All other income must be divided according to community property rules. This rule does not apply to partners in registered domestic partnerships, civil unions, or other similar formal relationships that aren't marriages under state law.
Note: This is an exception to the general community property rules where earned income is split 50-50 between the spouses.