The term community property refers to property laws that apply to married couples in certain states. Those states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Married couples in those states who choose to file separate federal tax returns must apply community property laws to their tax returns, which means splitting many items of income 50/50 with their spouse.
John and Mary are married and live in a community property state. John earns wages of $40,000 and Mary earns wages of $30,000. They decide to file separate tax returns. Both John and Mary will report $35,000 of wage income (50% of their own income and 50% of their spouse’s income).
The specific rules of income splitting differ from state-to-state. For example, income from interest and dividends is not always treated as community property.