Definition:\u00a0 “Generally, community property is property that you, your spouse (or your registered domestic partner), or both acquire during your marriage (or registered domestic partnership) while you and your spouse (or registered domestic partner) are domiciled in a community property state”.\u00a0<\/em> IRS Publication 555<\/a>.<\/p>\n <\/p>\n While at first glance this might not seem terribly complex, the laws vary in the nine states* that recognize community property law.\u00a0\u00a0Federal tax law respects the laws of the state of domicile.\u00a0 Further, to the extent the respective states allow deviation from statute\u00a0by written agreement,\u00a0 federal law will recognize that as well.<\/p>\n Normally, property acquired after marriage by either spouse is considered community property<\/strong>.\u00a0 Upon divorce the community assets are most typically divided by values.\u00a0 In California this is mandated by statute\u00a0(California Family Law Code Section 2550<\/a>)\u00a0as an equal allocation of the property\u00a0to the parties, although debt\u00a0may be\u00a0allocated ‘equitably’.\u00a0 Correspondingly this shifts the focus to the assigned value of the property as well as it’s status as separate or community.\u00a0 Nevada has a presumption of equal division unless there are other compelling circumstances such as wasteful dissipation of the community property by one spouse of the other; hiding assets; unlawful gifts; or financial misconduct.\u00a0 Texas and several other states do not require an ‘equal distribution’, but rather allow an ‘equitable distribution’.<\/p>\n Property that is purchased with separate funds, or\u00a0owned by one spouse prior to the marriage, or is received by gift or bequest during the marriage is considered separate property.\u00a0 <\/strong>Prior to the marriage it is important to document the separate property of each spouse and the related value.\u00a0 There are instances where the separate status can be commuted to community property in part or in whole.\u00a0 Most typically by co-mingling community assets in support of the separate property asset. Income<\/strong><\/p>\n Community income for federal tax purposes is income from community property during the marriage; salaries, wages and pay for services; net profit from a sole proprietorship; dividends, interest and rents;\u00a0and income from real estate that is treated as community property.\u00a0 Income from separate property belongs to the spouse who owns the property.\u00a0\u00a0 While this again seems straight forward, it can get complicated for example in determining filing status during the divorce.<\/p>\n Married taxpayers may elect either filing ‘married joint’ or ‘married separate’.\u00a0 Disregarding the ‘innocent spouse rules’<\/strong> for the moment, those who file jointly are jointly and severally liable for the tax on the aggregate income.\u00a0 While filing ‘married separate’ alleviates the joint liability, the total tax liability is most generally greater than if filed as ‘married joint’.\u00a0 For married taxpayers who file separate, they must include 50% of all community income along with 100%\u00a0of any separate property income they received.\u00a0 Form 8958<\/a>\u00a0can be helpful in determining the allocation between the parties\u00a0and protecting from an innocent or willful failure on the part of the other party.\u00a0 Pension, profit sharing\u00a0plans and\u00a0annuities\u00a0\u00a0create complex valuation issues compounded by the length of term, the timing of distributions and of course domicile particularly if it has changed from a non-community property state.<\/p>\n Up Next<\/strong><\/p>\n A blog post or even a series of posts cannot begin to cover the critical topics\u00a0 related to taxation in community property states.\u00a0 In future posts we will address: methodologies\u00a0for\u00a0valuation of businesses; \u00a0the application of Pereira \/ Van Camp; and of course everyone’s favorite – double dipping.<\/em><\/p>\n <\/p>\n <\/p>\n *Arizona, California, Idaho, Louisiana, Nevada, New Mexico Texas, Washington and Wisconsin (along with Puerto Rico and Alaska sometimes)<\/p>\n","protected":false},"excerpt":{"rendered":" The complexity and differences between the community property statutes\u00a0of the nine mostly western states* that have adopted them have created a tax consulting and preparation quagmire that can intimidate even the most knowledgeable accountants and attorneys.\u00a0 We will begin by addressing some basic Federal tax implications, and follow up in future posts with valuation issues. … Continue reading “Marital Dissolution in Community Property States”<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[254,255,153],"tags":[],"class_list":["post-653","post","type-post","status-publish","format-standard","hentry","category-business-valuation","category-divorce-2","category-fair-value"],"_links":{"self":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/653","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/comments?post=653"}],"version-history":[{"count":6,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/653\/revisions"}],"predecessor-version":[{"id":661,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/653\/revisions\/661"}],"wp:attachment":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/media?parent=653"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/categories?post=653"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/tags?post=653"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"images\"](\"https:\/\/www.excelsisaccounting.com\/blog\/wp-content\/uploads\/2016\/03\/images.jpg\")
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