When one spouse is a California resident and the other is not, California’s community property rules can affect how much of the couple’s income California taxes. The rules are often misunderstood in both directions: one spouse’s move does not take all of the couple’s income out of California, and California does not tax all of the nonresident spouse’s income either.
Community Property Basics
California is a community property state. According to IRS Publication 555, the community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. The IRS explains that the law of the state where a person is domiciled determines whether that person has community property or community income, and that spouses with different domiciles need to check the laws of each state.
As a general matter, community income is treated as belonging one-half to each spouse. That allocation is what drives the California results described below.
The Resident Spouse
A California resident is taxed on all income, regardless of source. The Franchise Tax Board (FTB) notes that when one spouse is a resident of California and the other is not, the couple may be required to report income earned outside California. FTB Publication 1031 illustrates the point with an example in which half of a nonresident spouse’s wages are taxable to California because California is a community property state and the other spouse is a California resident.
In other words, the resident spouse’s half-interest in community income can bring part of the nonresident spouse’s out-of-state earnings into California’s tax base.
The Nonresident Spouse
A nonresident spouse is taxed only on income from California sources. That can still include community income: the FTB’s Form 540NR instructions explain that if either spouse earned California-source income while domiciled in a community property state, the community income is split equally between the spouses, and both spouses have California-source income. For example, half of the resident spouse’s California wages may be California-source income of the nonresident spouse.
Community property splits income between spouses; it does not pull all of a couple’s income into California. The resident spouse is taxed on his or her share of everything, and the nonresident spouse is taxed only on his or her share of California-source income.
Filing Status
California generally requires the same filing status used on the federal return (Revenue and Taxation Code (R&TC) § 18521). Married couples may file separate California returns, even if they file jointly for federal purposes, if either spouse was an active member of the armed forces during the year, or if either spouse was a nonresident for the entire year and had no California-source income. The 540NR instructions add that when community income from California sources is split between spouses domiciled in a community property state, both spouses have California-source income and the nonresident-spouse exception does not apply.
Domicile and the State of the Move
Because community property status depends on the law of the domicile, the destination state matters. Nevada and Texas are community property states, while Florida does not appear on the IRS list of community property states. A couple whose domicile changes, or whose spouses have different domiciles, should review how each state’s law characterizes the income.
Each Spouse’s Residency Is Determined Separately
Residency is decided for each individual under Revenue and Taxation Code section 17014. At the same time, the location of a spouse or registered domestic partner and children is one of the factors the FTB lists in Publication 1031. When one spouse stays in California, that fact is part of the analysis of the other spouse’s claimed move, and it calls for clear documentation of where the moving spouse actually lives and works.
The Bottom Line
For couples who live in different states, California’s community property rules reach the resident spouse’s share of community income wherever it is earned, and the nonresident spouse’s share of California-source community income. Understanding how income is characterized, which filing status is allowed, and how each spouse’s residency is supported avoids surprises in a later audit.
Married and living in different states?
Tax attorney Cassra Minai, Esq. can review how the community property rules apply to your situation in a confidential consultation.