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I am trying to confirm how income allocation works in a community property state.

Are you supposed to combine your incomes and then split it evenly with your spouse?

For example,

  • Person A and person B are married and live in community property state California.
  • Person A makes 100K gross wages and person B makes 50K.
  • If they file "married - filing separate" would each person's total wages reported be calculated as 100K+50K / 2 = 75K?

Do you have the option to allocate the income anyway you would like?
For example say person A as making 120K income and person B as making 30K income?

  • By 'default' (and in most countries in the world), Married Filing Separate requires you to report your income and only your income. The point of "Married filed jointly" is that incomes are combined, but all tax brackets are doubled. 99 cases out of a hundred, this reduces your tax liability, especially as some tax-saving measures are unavailable for MFS (for example, most refundable tax credits are only available when filing Single, Head of Household, or Married Filing Jointly). Your tax software should tell you which is better in your case. – Grade 'Eh' Bacon Jun 21 '17 at 15:36
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Should probably have a CPA look over things to make sure it is done correctly, but I did find some info on married filing separately.

According to IRS Pub 504 (emphasis mine)

Married Filing Separately

If you and your spouse file separate returns, you should each report only your own income, exemptions, deductions, and credits on your individual return. You can file a separate return even if only one of you had income. For information on exemptions you can claim on your separate return, see Exemptions , later.

Found the California rules in FTB 1051a. Looks like it might depend on how you file federally --

If you are married and file a joint federal tax return, you may file separate for California if either of the following exceptions applies:

• One spouse is an active duty military member.

• One spouse is a nonresident for the entire tax year and had no California sourced income during the tax year. For more information get FTB Publication 1031

If you file a separate tax return, you must follow the property rules from your state of domicile for the division of income and deductions. If you domicile in a community property state, you and your spouse/RDP must each report half of the community income, plus your separate income on your respective separate tax returns

  • This is the correct answer; good references. – Grade 'Eh' Bacon Jun 21 '17 at 15:37
  • Not from the US, so ignore if this is "obvious" but in "each report half of the community income, plus your separate income on your respective separate tax returns" how do you decide what is community income and what is separate income? – TripeHound Jun 22 '17 at 13:24
  • @TripeHound Luckily the California rules define "community income" -- "Generally, income generated from community property or property held jointly is community income. Community income also includes compensation for services if the spouse/RDP earning the compensation is domiciled in a community property state" – BlakeP Jun 22 '17 at 15:39

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