By: Coleman Jackson, Attorney, CPA
January 10, 2017
There are federal tax implications of marriage in a community property state. Federal tax law depends upon the marital status of the parties under state law. Marriage, its existence and dissolution are fully within the jurisdiction of the states of the United States. There are nine community property states in the United States. They are:
- New Mexico,
- Washington, or
In this blog, we will limit our discussions to married couples domiciled in Texas. Anyone reading this blog who are married or contemplating marrying someplace other than Texas, need to take this fact into consideration while reading this blog. In Texas, Texas Family Code, Chapter 2 sets out two lawful categories of marriages that may be entered into in the State of Texas. They are, the ceremonial marriage, commonly known as the formal or licensed marriage; and the informal marriage, commonly known as “common law marriage”. A ceremonial marriage is entered into in Texas when the couple takes an oath, obtains a license to marry and goes through a marriage ceremony satisfying all of the marriage requirements in the Texas Family Code chapter 2. Whereas a common law marriage is entered into in Texas when a couple dispense with obtaining a license and going through a marriage ceremony; but yet agrees to be married, live together as husband and wife, and hold themselves out to others as husband and wife. In Texas a common law marriage is a legal and valid marriage and can only be terminated by death, divorce or annulment—exactly like a formal marriage. See the Texas Family Code chapter 2.
Once the marriage covenant has been taken whether formally or informally, the State of Texas recognizes the sanctity of the marriage, and federal tax laws applies to the couple as a marital union. Texas community property laws will determine if the couple has community property, community income, or both. Since Texas recognizes your marriage and Texas is a community property state, you can file a federal joint tax return or separate tax return. You cannot file as a single person any longer. Married couples filing jointly usually pay less tax than a married couple filing separate but married federal tax returns. But there could be a host of reasons why a couple should file separate tax returns. Some couples marry for convenience. They clearly must consider the tax implications of such decisions. For example, the Tax Court ruled in Churchill v. Comm’r, T.C. Memo 2001-182 (8/1//11) that although John alleged that he married Sharon for convenience ( to get her health insurance benefits), the IRS Commissioner was right to go after Sharon’s assets and income in considering John’s Offer in Compromise for settlement of his unpaid tax liabilities. Marriages for convenience—they could be unlawful under federal & states laws, and have other unintended consequences far beyond U.S. tax laws.
If the married couple files separate federal tax returns, the couple must determine the community income and the separate income. In a community property state like Texas, property acquired during marriage is community property that is it is commonly owned by the spouses. One half of all community income belongs to each spouse during the marriage regardless of which spouse worked for it, earned it or received it. Community property laws also affect the taxpayer’s basis in property inherited from a married person who lived in a community property state.
Division of property between co-owners at the incident of divorce or otherwise (couples domiciled in Texas are co-owners of property acquired with community property during marriage; the rebuttable presumption is that all property acquired in a marriage in Texas is community property) would recognize no gain or loss upon disposition of the property. So said the United States Supreme Court in United States v. Davis, 370 U.S. 65 (1962).
Moreover, Innocent Spouse and Equitable Tax Relief under the Internal Revenue Code could possibly be available for spouses tangled up in the federal tax webs resulting from their spouse’s decisions and actions.
This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.
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