Marital Status, Community Property, and Tax Filing
By Bruce Moeller, CPA, JD, Partner
Tax Filings – What to do when your marital status changes during the year?
You got married this year. Congratulations! You likely had a celebration with friends and family. Or, you’re separated and in the process of “uncoupling?” You’ve probably met with an attorney. (Hopefully it isn’t too difficult a time and process for you.)
Either way, your tax situation just became substantially more complicated. We can help you understand how those rules affect your tax filings and help in many other ways. Sorting out all the issues can become quite involved, and a lot is at stake! Having a qualified and experienced tax advisor is vital, in addition to working with your qualified attorney. (This article doesn’t address important marital property issues, such as dividing assets, asset valuations, special tax considerations, spousal or child support, etc.) We understand what’s at stake and can help you.
What are the general rules – How do I report my income and file my tax returns?
For purposes of this short article, we’ll assume you are a California resident. California is one of nine community property states, and the rules apply to all residents unless they otherwise have a binding agreement (premarital or anti-nuptial) between themselves. Community property rules govern income and asset divisions. If you are unclear who “owns” the asset, the tax reporting also remains unclear. Ultimately, the court may resolve the issues for you, or you can mediate and agree privately.
Whether you are a husband-wife, or a same sex couple, the rules in California are now basically the same.
Filing Status (Married, Single, or ???)
Filing status is determined on the last day of the year. If you are not married you generally file as “single.” If you are married, you can either file a joint tax return with your partner, or file a return as “married filing separately.” Generally, filing separately causes higher tax, but there are many exceptions and reasons you should file separately. You may also meet an exception and file as “head of household” if you maintained a household for more than half the year for a qualifying household member other than your partner-spouse.
What Income do I report? What is Community Property?
You need to report your separate property income, withholding, payments, credits and deductions plus one-half of your share of the community property items. If you are required to file a tax return, you need to decide whether it’s community or separate, even if the issue is unresolved. If what you reported as separate turns out to be community (or vice-versa) you may need to file an amended tax return.
General Overlay – Community Property
Property acquired during a marriage is presumed to be community property. The basic idea is that property acquired by either partner-spouse during marriage through the time, energy and skill of one or both partner-spouses is treated as owned by the community. In regard to tax returns, it means that you own one-half of the community income and one-half of the community deductions.
When the marital status changes during the year and the couple files separate returns, income, withholding, deductions and other tax items need to be allocate between community property and separate property. For example, if a couple marries on June 30th, the community begins June 30th. Income and deductions prior to that date are generally considered “separate” property. When a couple uncouples, the key date is the “date of separation” which is generally defined as the date in which the parties separate with the intent not to return to the marriage.
During the year of marriage or dissolution, your tax professional will need to help you follow the time line and make appropriate distinctions and allocations between the parties.