What Is Community Income?
Community income is the earnings of a taxpayer who lives in community property states. At the time of this writing, there are nine community property states. These states include Wisconsin, Washington Texas, New Mexico, Nevada, Louisiana, Idaho, California and Arizona. In these states, community income belongs equally to both spouses, just as with all other property, owned or acquired by either spouse during the marriage. These states view marriage as a partnership where both individuals share equally in the assets.
Further, earnings from either spouse outside of the marriage do not fall into the consideration of being community income. These funds may come before or after marriage.
Types of Community Income and Registered Domestic Partners
Community income isn't always just money. It can include real estate, as well as salaries, wages and other payments you receive for services. Community income corresponds with community property, which are assets or other property held in common by married couples in community property states. These states follow the rule that all assets acquired during a marriage are considered co-owned equally by each spouse. This marital property includes earnings (community income), all property bought with those earnings as well as all debts accrued during the marriage. Community property begins at the marriage and ends when the couple physically separates with the intention of not continuing the marriage, ending in divorce. Therefore, any earnings or debts originating after separation are considered separate property.
Community property laws in Nevada, Washington and California also apply to registered domestic partners. This status means that each partner must report half of the combined income, even if the couple is not married. Only nine states are classified as community property states, but state laws vary, and some learn more toward community property than others. When spouses can agree on an equitable distribution of assets, community property laws become largely unimportant. It’s only when the court has to decide how to structure the division that they become the deciding factor.
- Community income is income earned by taxpayers who live in community property states.
- Community income states include Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.
- Community income can include real estate and other property.
Real World Example
Community income laws frequently apply to couples who live in community property states and divorce. The spouses divide the community assets between themselves and are then taxed on half of the income for the part of the year before the dissolution of the marriage. Any earnings the spouses receive after the divorce is then considered separate income and taxable only to the earning individual.