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Community Property States & What It Means

Posted By Jim On 09/16/2009 @ 12:05 pm In Personal Finance | 15 Comments

You know those common misconceptions people have about money that are just obscure enough to escape further investigation? In other words, things you hear that you probably will never encounter and so you never look into to find out the truth? The concept of community property was one of those things and with the power of the internet, I sought out what that exactly meant.

In a community property state, everything you acquire after you are married is owned by both spouses. Everything you had before you were married isn’t jointly owned, it’s owned by the one who owned it before the marriage. If there is a divorce or some other separation, then the distinction of ownership becomes important.

Why does this matter? Outside of divorce or separation, there are special spousal liability and tax rules you have to follow. For example, if you live in a community property state then each spouse is responsible for half of the tax on communal income. So if Spouse A earns $50,000 and Spouse B earns $10,000, Spouse A is responsible for tax on $30,000 and Spouse B is responsible for tax on $30,000. This gets hairy when you file separately.

Which states are community property states? Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

No two community property state laws are the same. I didn’t dig too much deeper into this because this is where my interest ended but I read that the various laws of each state differ from one another. For example, California requires a 50/50 split of property whereas others do not. Some divide debts equally as well as assets, but others don’t.

If you’d like to know every nook and cranny about community property states with respect to the IRS, or simply want some mind numbing reading, check out Publication 555 [3].


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[3] Publication 555: http://www.irs.gov/pub/irs-pdf/p555.pdf

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