Personal Taxes

Live in a Community Property State? File Separately or Jointly?

A common error that people make is to file Married Filing Separate when that designation does NOT benefit them. Filing separately is particularly problematic if you live in a Community Property State, for reasons which we will explain below.

First, here are the Community Property States:

Arizona - California - Idaho - Louisiana - Nevada - New Mexico - Texas - Washington - Wisconsin

In community property law, your liability is your spouse's liability. Her liability is yours. Your assets are hers. And hers are yours. (Exceptions: assets and liabilities brought into the marriage).

1. No Separation of Liability. The bottom line is that if you live in one of these states there really is no separation of liability. If you owe taxes, your spouse automatically will owe. And if she owes, you will owe. Therefore, filing separately offers just the "illusion" of separate liability. But in truth, you both really will owe.

2. Filing Separately is a Higher Tax Rate. Furthermore, filing separate is paying a higher tax rate. Yes some spouses do NOT get along and want financial distance from each other! But paying higher taxes and filing separately can be a cut your nose to spite your face type of proposition.

3. Filing Separately Usually Requires a 50/50 Split of Income and Deductions. If the higher tax rate and lack of separation of liability aren't enticing enough to you to file jointly then filing separately means that you should split everything 50/50 on your tax return...However, many people do not split 50/50 income as per the law...and just report their income on MFS return. This can work, but it should be known that it does run a small audit risk.

4. Filing Jointly But Non-Liable Spouse Getting Refund. So, what if you file jointly, but you want to see if you can avoid your "refund" going to your spouse's old tax liability? You can use the Injured Spouse Allocation to get your refund. But this will delay your refund to up to 14 weeks.

Also see - Getting Married? Better Check Your Status

Is 2024 the year to solve your tax issue? WATAX is ready to assist you now. Please call us at 1-888-282-4697 or email us a description of your tax issue and we'll contact you promptly.

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