Filing Status & Treatment Of Community Income
Your tax filing status plays a role in how community income and community property are treated in regard to federal taxes. Below, you'll learn more about how the IRS views community assets for each filing status:
Married Filing Jointly
For a married couple in a community property state who files a joint tax return, separating community income to each spouse is unnecessary.
Married Filing Separate
If the spouses file separate returns, each spouse must report one-half of community income, and if the couple is estranged or uncooperative, determining the correct amount of income that each should report may be difficult. Exceptions to the general rule that community income is to be reported equally by the spouses may apply:
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§ 66(a) – Spouses Live Apart - provides rules for treating community income when the spouses live apart and don’t share income for the entire year.
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§ 66(b) – Traditional Relief - allows the IRS to disregard community property laws when one spouse is not notified of the type and amount of community income. CAUTION: This rule can be used only by IRS in order to disallow the benefits of community property laws to a taxpayer and cannot be used by a taxpayer to avoid his or her liability for tax on community income paid to and/or earned by the taxpayer's spouse. This relief is not considered until after the IRS initiates an audit.
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§ 66(c) – Equitable Relief - permits the IRS to grant relief from the operation of community property laws under certain circumstances (this is akin to the “innocent spouse” relief granted certain married joint filers), and further authorizes IRS to grant equitable relief from operation of community property laws if a taxpayer is unable to meet specific requirements of this code section. This relief cannot be requested in advance and is requested only after traditional relief has not been granted.
These three items of relief are discussed in detail later in this chapter.