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What is Form 8958: Allocation of Tax Amounts Between Certain Individuals in Community Property State

Updated for Tax Year 2016


OVERVIEW

Several states have “community property” laws, which say that most income earned and most assets acquired during a marriage are the equal property of both spouses, regardless of whose name is on the check or the title. This can sometimes create additional work for couples filing separately for federal income taxes. The Internal Revenue Service (IRS) created Form 8958 to allow couples in community property states to correctly allocate income to each spouse that may not match what is reported to the IRS.


Community property states

Couple walking and holding hands

Nine states have community property laws. Married couples in these states typically need Form 8958 if they file separate rather than joint tax returns:

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

In addition, Alaska allows couples to declare their assets community property by signing a written agreement. 

Meanwhile, three community property states allow unmarried couples to create “registered domestic partnerships,” which are legally recognized relationships with a status similar to marriage. Community property laws generally apply to domestic partnerships as well as marriages. Those states are: 

  • California
  • Nevada
  • Washington

Domestic partners in these states also need Form 8958.

 

Married filing separately

Imagine a husband and wife who both earn income from work. He makes $40,000 a year, and she makes $50,000. If they file a joint federal tax return, there’s no problem, regardless of where they live: They simply report a combined $90,000 in income.

Now say they want to file separate returns. In common-law states, it’s still not a problem: The husband reports $40,000 on his return, and the wife reports $50,000 on hers.

If they live in a community property state, though, each is entitled to half the other’s income:

  • Legally, they each have $45,000 in income ($90,000/2 = $45,000).
  • The problem is that they can’t simply report $45,000 on each separate return, since that won’t match what their employers reported to the IRS.

That’s where Form 8958 comes in.

Information on Form 8958

On Form 8958, a couple lists individual sources of income for each of them, such as employers, banks that pay interest, stocks that pay dividends, capital gains and tax refunds. The couple reports the total amount received from each source, then allocates a portion of the total to each person.

Form 8958 essentially reconciles the difference between what employers (and other income sources) have reported to the IRS and what the spouses will be reporting on their federal tax returns. Both spouses must include a copy of the form with their tax return.

Domestic partnerships

The federal government doesn’t recognize domestic partnerships, so domestic partners must each file a federal tax return as a single person, even if they file a joint state return. Even though the federal government doesn't recognize these partnerships, they do recognize state's community laws even as they apply to domestic partnerships.

This means that domestic partners in community property states have to allocate their income. This creates the same extra work as for married couples filing separate returns:

  • Legally, their income is probably not going to match what has been reported to the IRS.
  • So domestic partners in California, Nevada and Washington also use Form 8958.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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