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The Community Income Reporting Rule
Only nine states recognize the concept of “community property”: Washington, Idaho, Wisconsin, California, Nevada, New Mexico, Arizona, Texas and Louisiana. The remaining states defer to the “title” in which property is held or income earned. In community property states, the marital relationship is referred to as the “marital community” and each member of that “community” is treated as an undivided one-half partner in income of the other partner. This fictional “marital community” may result in significantly different tax consequences if the parties do not file jointly. In community property states, each spouse reports only one half of his or her income, but must also report one half of the other spouse's income. This may seem like an easy task; however, for couples that remain married but no longer live together, or worse yet, refuse to speak to one another or cooperate in any way, this can quickly become a tax nightmare. Luckily, Congress has thought of, and provided for, this problem ' sort of.
Relief Under IRC Section 66(a) or (b)
Under ' 66(a) of the Internal Revenue Code, in certain circumstances a married couple can “qualify” to be taxed as though they live in a non-community property state, and thus avoid being required to divide their incomes for reporting purposes. In order to qualify for this treatment, the couple must: 1) be married; 2) live apart; 3) have earned income; 4) not file a joint return; and 5) cannot have made any transfers of community earned income during the tax year. If a taxpayer fails any one of these tests, he or she will not be granted relief under IRC
' 66(a) from the community income reporting rules. However, even if a taxpayer fails to qualify for relief from the community income reporting requirements under IRC ' 66(a); he or she may still qualify for relief from the community income reporting rules under IRC ' 66(b). Under IRC ' 66(b), the IRS may disregard the community income reporting rules if the earning taxpayer spouse establishes that he or she acted as if the income was not subject to community income rules (e.g., paid tax on the income) and failed to notify his or her spouse of the income.
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