Community Property If you are married and your domicile (permanent legal home) is in acommunity property state, special rules determine your income. Some ofthese rules are explained in the following discussions. For moreinformation, get Publication 555. Community property states.The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Community Income If your domicile is in a community property state during any partof your tax year, you may have community income. Your state lawdetermines whether your income is separate or community income. If youand your spouse file separate returns, you must report half of anyincome described by state law as community income, and your spousemust report the other half. Each of you can claim credit for half theincome tax withheld from community income. Community property laws disregarded.Community property laws do not apply to an item of communityincome, and you will be responsible for reporting all of it if: You treat the item as if only you are entitled to theincome, and You do not notify your spouse of the nature and amount ofthe income by the due date for filing the return (includingextensions). Relief from separate return liability for community income.You are not responsible for reporting an item of community incomeif all of the following conditions exist. You do not file a joint return for the tax year. You do not include an item of community income in grossincome on your separate return. You establish that you did not know of, and had no reason toknow of, that community income. Under all facts and circumstances, it would not be fair toinclude the item of community income in your gross income. Spousal agreements.In some states a husband and wife may enter into an agreement thataffects the status of property or income as community or separateproperty. Check your state law to determine how it affects you. Spouses Living Apart All Year Special rules apply if all the following conditions exist. You and your spouse live apart all year. You and your spouse do not file a joint return for a taxyear beginning or ending in the calendar year. You or your spouse has earned income for the calendar yearthat is community income. You and your spouse have not transferred, directly orindirectly, any of the earned income in (3) between yourselves beforethe end of the year. Do not take into account transfers satisfyingchild support obligations or transfers of very small amounts or value. If all these conditions exist, you and your spouse must report yourcommunity income as explained in the following discussions. Earned income.Treat earned income that is not trade or business or partnershipincome as the income of the spouse who performed the services to earnthe income. Earned income is wages, salaries, professional fees, andother pay for personal services. Earned income does not include amounts paid by a corporation thatare a distribution of earnings and profits rather than a reasonableallowance for personal services rendered. Trade or business income.Treat income and related deductions from a trade or business thatis not a partnership as those of the spouse carrying on the trade orbusiness. If capital investment and personal services both produce businessincome, treat all of the income as trade or business income. Partnership income or loss.Treat income or loss from a trade or business carried on by apartnership as the income or loss of the spouse who is the partner. Separate property income.Treat income from the separate property of one spouse as the incomeof that spouse. Social security benefits.Treat social security and equivalent railroad retirement benefitsas the income of the spouse who receives the benefits. Other income.Treat all other community income, such as dividends, interest,rents, royalties, or gains, as provided under your state's communityproperty law. Example.George and Sharon were married throughout the year but did not livetogether at any time during the year. Both domiciles were in acommunity property state. They did not file a joint return or transferany of their earned income between themselves. During the year theirincomes were as follows: George Sharon Wages $20,000 $22,000 Consulting business 5,000 Partnership 10,000 Dividends from separate property 1,000 2,000 Interest from community property       500       500 Totals   $26,500   $34,500 Under the community property law of their state, all the income isconsidered community income. (Some states treat income from separateproperty as separate income--check your state law.) Sharon didnot take part in George's consulting business. Ordinarily, they would each report $30,500, half the totalcommunity income, on their separate returns. But because they meet thefour conditions listed earlier under Spouses Living Apart AllYear, they must disregard community property law in reportingall their income except the interest income from community property.They each report on their returns only their own earnings and otherincome, and their share of the interest income from communityproperty. George reports $26,500 and Sharon reports $34,500. Ending the Community When the marital community ends, the community assets (money andproperty) are divided between the spouses. Income received before thecommunity ended is treated according to the rules explained earlier.Income received after the community ended is separate income, taxableonly to the spouse to whom it belongs. An absolute decree of divorce or annulment ends thecommunity in all community property states. A decree of annulment,even though it holds that no valid marriage ever existed, usually doesnot nullify community property rights arising during the "marriage."However, you should check your state law for exceptions. A decree of legal separation or of separate maintenancemay or may not end the community. The court issuing the decreemay terminate the community and divide the property between thespouses. A separation agreement may divide the community propertybetween you and your spouse. It may provide that this property, alongwith future earnings and property acquired, will be separate property.This agreement may end the community. In some states, the community ends when the spouses permanentlyseparate, even if there is no formal agreement. Check your state law. Alimony (Community Income) Payments that may otherwise qualify as alimony are not deductibleby the payer if they are the recipient spouse's part of communityincome. They are deductible as alimony only to the extent they aremore than that spouse's part of community income. Example.You live in a community property state. You are separated but thespecial rules explained earlier under Spouses Living Apart AllYear do not apply. Under a written agreement, you pay yourspouse $12,000 of your $20,000 total yearly community income. Yourspouse receives no other community income. Under your state law,earnings of a spouse living separately and apart from the other spousecontinue as community property. On your separate returns, each of you must report $10,000 of thetotal community income. In addition, your spouse must report $2,000 asalimony received on line 11 of Form 1040. You can deduct $2,000 asalimony paid on line 31a of Form 1040.