Community property laws apply to married individuals living in community property states who file separate federal tax returns. Generally, each spouse must report half of all combined community income and deductions in addition to his or her separate income and deductions. For example, each spouse reports half of their own W-2 wages and half of their spouse's W-2 wages on their MFS tax return. State community property laws determine how income should be reported on the federal income tax return. Generally, community income includes:
- Income from community property
- Salaries, wages, or pay for services of the taxpayer, the taxpayer's spouse or RDP, during the marriage or registered domestic partnership
- Real estate that is treated as community property under the laws of the state where the property is located
Generally, income from separate property is the separate income of the spouse or RDP who owns the property. See the examples of separate property on page 3 of IRS Publication 555.
If the filing status on the return is married filing separately and the taxpayer lives in a Community Property State (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) Form 8958 must be completed and filed with the return.
To properly report community income in a married filing separate tax return, you will enter half of the taxpayer's AND the half of the spouse's community income items separately, dividing the amounts from each in half. For example, Spouse A and Spouse B are domiciled in a community property state. Spouse A's W-2 wages are $40,000 and the amount of Spouse A's federal withholdings is $4,000. Spouse B's W-2 wages are $60,000 and the amount of Spouse B's federal withholdings is $6,000. Enter Spouse A's W-2 in the income menu, but only enter $20,000 in box 1 (half of the community income) and $2,000 box 2 (half of the community withholdings). Next, enter Spouse B's W-2 in the income menu as if the Spouse A had earned it. Enter $30,000 in box 1 (half of the community income) and $3,000 in box 2 (half of the community withholdings).
Enter any other community income items (interest, dividends, etc.) in the income menu, reporting only half of the amount of each item. You will use Form 8958 to allocate the community income amounts between Spouse A and Spouse B.
To access Form 8958, from the Main Menu of the Tax Return (Form 1040) select:
- Miscellaneous Forms
- MFS Allocation for Community Property States (8958)
- The information from the tax return will pull to the taxpayer's column of the form.
- Allocate half of the amount from each W-2 (or other community income and deductions) to the spouse. The total column will reflect the total amount of all community items.
NOTE: This is a guide on entering the MFS Allocation Record into the TaxSlayer Pro program. This is not intended as tax advice.