When couples in a same-sex marriage live in a community property state, they must follow community property laws on their federal tax return, even though the federal government doesn’t recognize their marriage.
How does this work when a same-sex couple moves from a community property state to a non-community property state during the middle of the year? It makes for a headache-inducing situation. Indeed, some of the most complicated tax returns I’ve ever prepared have been for same-sex couples that moved from California (a community property state) to Iowa (not a community property state) during the middle of the year.
Most states in the United States follow “common law,” but there are nine states that use “community property” law: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
For tax purposes, community property law treats most income and some (but not all) deductions of married couples as belonging half-and-half to each spouse. When spouses file separate tax returns, each spouse reports half of their own income and half of their spouse’s income.
Note that this only applies when married couples in those states file separate tax returns.
John and Betty are a married couple in California, which is a community property state. John’s income is $80,000. Betty’s income is $20,000 (so $100,000 of total income as a couple). They decide to file separate federal tax returns. On those separate returns, John and Betty will each report $50,000 of income — 1/2 of their own and 1/2 of their spouse’s income.
How Does This Apply to Couples in a Same-Sex Marriage?
Even though the federal government doesn’t recognize same-sex marriages, the IRS says that couples in same-sex marriages or domestic partnerships (RDPs) in community property states must apply community property laws on their separate federal tax returns. See IRS Letter Ruling 201021048. Couples in same-sex marriages or RDPs in community property states CANNOT file as married, but they MUST apply community property laws.
Angie and Alice are in a same-sex marriage in California. Because of the Defense of Marriage Act, Angie and Alice cannot file as a married couple on their federal tax returns. They can only file as single or head of household. But they MUST apply community property laws on those federal returns, so they will have to split their income and deductions according to community property laws, same as in the “John and Betty” example above.
Now, let’s muddy the waters and say that Angie and Alice move to a non-community property state, such as Iowa, during the middle of the year. I’ll explore that issue in Part 2.