Travis H. Long, CPA, Inc. Blog

Originally published in the Pacific Grove Hometown Bulletin

June 20, 2012

Community Property/Income and Deductions

A complicating factor with divorces is that state law governs a good bit of how taxation will work, and each state has different laws. California is one of nine community property states.  It is has similarities to other community property state tax laws, but differences as well.  In California, community property laws say that income and deductions derived or expended while married are generally split 50/50 during the community period.  The income and deductions generated after the community period ends belong to each taxpayer.  The community period for California purposes ends when the taxpayers separate with no intent to get back together.  This does not require a final decree of divorce or separate maintenance, but is based on facts and circumstances.

Many divorcing couples often take the approach, “You report your W-2 on your returns and I will report mine on my returns,” but that is technically not correct since in most cases they should each be reporting half of each other’s W-2 during the community period.  Spouses are required to provide the necessary information for the other spouse to file a complete and accurate return.  This situation can lead to an advantage or an abuse depending on the familiarity of each spouse with the tax laws.

Although the laws do get complex, generally speaking, community property is anything acquired during the community period, or any separate funds brought into the marriage that are tainted by intermingling the funds with community funds. If the taxpayer maintained any separate property during the marriage, then the income and deductions for separate property would go to the spouse who owned the property.  An example of this would be: Spouse A brings a rental property and a large bank account to the marriage and maintains it in his or her own name.  Spouse A uses the bank account exclusively for the rental property and pays all rental property expenses and deposits all the rental property income into the bank account.  Since there is no intermingling with any assets created after the marriage began, the property would maintain its character as separate property and the income and deductions would fall 100% to spouse A in the year of divorce.

Splitting Tax Withholdings and Estimates

Taxes withheld (such as with a W-2) during the community period are generally split 50/50.  Estimated tax payments made are credited under the taxpayer whose social security number is submitted with the payment.  Individuals going through a divorce should be alert to this as they may not realize the other spouse has made payments in their own name from community property funds.  For California, estimated payments with both social security numbers submitted are applied to the tax return of the first taxpayer to file.  However, taxpayers are supposed to submit a notarized statement signed by both individuals prior to either filing, specifying how the taxes withheld and joint estimates should be applied.  Note, a court order in the divorce proceedings will control and overrule any of these laws, including a retroactive application of joint estimated payments to the spouse the court order specifies.

To be continued next issue…

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.