If you live in a community property state and file your federal return as Married Filing Separately (MFS), you may be required to divide community income between spouses and complete Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States.
What Is a Community Property State?
A community property state is a state where most income and property acquired during marriage is considered jointly owned by both spouses.
Community property laws generally apply to:
- Income earned during marriage
- Assets acquired during marriage
- Property that spouses agree to convert from separate property to community property
Certain states also apply community property rules to Registered Domestic Partners (RDPs).
The following states are community property states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada*
- New Mexico
- Texas*
- Washington*
- Wisconsin
*Nevada, Texas, and Washington do not impose a state income tax.
How Community Property Laws Affect Federal Tax Returns
Federal tax law follows the community property laws of your state of domicile (your legal residence).
If you file a federal return as Married Filing Separately, you generally must:
- Report one-half of all community income
- Report all of your separate income
- Allocate community withholding appropriately between spouses
If you are a Registered Domestic Partner in a state that recognizes community property rules for RDPs, similar allocation rules may apply.
What Is Form 8958?
Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, is used to explain how community income, withholding, deductions, and credits were divided between spouses or registered domestic partners.
You generally need Form 8958 when:
- You live in a community property state, and
- You file separately from your spouse or registered domestic partner
The form is used to reconcile differences between the amounts reported on original tax documents and the amounts actually reported on each taxpayer's return.
How to Access Form 8958 in the Program
Navigate to:
- Federal Section
- Miscellaneous Forms
- Allocation of Tax Amounts for Individuals in Certain States (Form 8958)
Enter your spouse's share of community income and withholding in the applicable fields.
How to Complete Form 8958 for Wages (W-2 Income)
How to Complete Form 8958 for Wages (W-2 Income)
Before beginning, gather:
- Your W-2 forms
- Your spouse's W-2 forms
- Any other community income information
Split Community Income and Withholding for All W-2 Forms
Enter every W-2 for both spouses into the return.
For example, go to:
- Federal
- Income (Select my forms)
- W-2
Then, for each W-2:
- Report one-half of the wages in Box 1
- Report one-half of the federal withholding in Box 2
If the W-2 belongs to your spouse:
- Leave Boxes 3 through 6 blank
If the W-2 belongs to you:
- Report Boxes 3 through 6 exactly as shown on your W-2:
- Enter your W-2(s)
- Enter your spouse's W-2(s)
Each W-2 should be entered separately.
Adjust Other Community Income
Any additional community income should also be adjusted so that only one-half of the community amount is reported on each spouse's return.
Complete Form 8958
After all income and withholding have been adjusted, complete Form 8958 to explain the allocation to the IRS.
How to Report Self-Employment Income in a Community Property State (MFS)
How to Report Self-Employment Income in a Community Property State When Only One Spouse Operates the Business
Self-employment income receives unique treatment under community property rules.
Although the business income is generally considered community income, self-employment (SE) tax belongs only to the spouse who actually operates the business.
As a result:
- Income may be allocated between spouses for income tax purposes.
- Self-employment tax remains entirely with the operating spouse.
When Only One Spouse Operates the Business
Step 1: Enter the Full Schedule C
On the return of the spouse who runs the business:
- Go to Schedule C.
- Enter all business income.
- Enter all business expenses.
- Allow Schedule C to calculate the full profit or loss.
This ensures self-employment tax is calculated correctly.
Step 2: Allocate the Income on the Operating Spouse's Return
Navigate to:
Federal → Income → Less Common Income → Other Income → Other Income
If Schedule C Shows a Profit
Enter:
- Description: "MFS Community Property Allocation – Schedule C"
- Amount: One-half of the profit as a negative number
Example:
- Schedule C Profit: $20,000
- Other Income Entry: -$10,000
This removes the non-operating spouse's share from the operating spouse's taxable income while preserving the full SE tax calculation.
If Schedule C Shows a Loss
Enter:
- Description: "MFS Community Property Allocation – Schedule C"
- Amount: One-half of the loss as a positive number
Example:
- Schedule C Loss: -$4,000
- Other Income Entry: +$2,000
This removes the non-operating spouse's share of the community loss.
Step 3: Enter the Allocation on the Non-Operating Spouse's Return
The non-operating spouse should:
- Not create a Schedule C
- Navigate to:
- Federal → Income → Less Common Income → Other Income → Other Income
Enter:
- Description: "MFS Allocation of Self-Employment Income (or Loss)"
For a profit:
- Enter one-half of the profit as a positive number
For a loss:
- Enter one-half of the loss as a negative number
Example:
- Schedule C Profit: $20,000
- Non-operating spouse reports: +$10,000
Example:
- Schedule C Loss: -$4,000
- Non-operating spouse reports: -$2,000
When Both Spouses Operate the Business
If both spouses materially participate in the business:
- Each spouse creates a separate Schedule C.
- Each Schedule C reports:
- One-half of the business income
- One-half of the business expenses
This automatically allocates:
- Income
- Expenses
- Self-employment tax
No Other Income adjustments are generally required.
How Community Property Losses Are Allocated
How Community Property Losses Are Allocated
A Schedule C loss is generally community property and must be split equally unless a separate-property exception applies.
Operating Spouse
The operating spouse:
- Reports the full loss on Schedule C
- Receives no SE tax liability because the business produced a loss
- Enters one-half of the loss as positive Other Income to remove the other spouse's share
Example:
- Schedule C Loss: -$4,000
- Other Income Adjustment: +$2,000
Non-Operating Spouse
The non-operating spouse enters:
- One-half of the loss as a negative Other Income adjustment
Example:
- Other Income Entry: -$2,000
Result
- The loss is properly split between spouses.
- Self-employment tax remains correct.
- Each spouse receives the appropriate share of the loss.
What If I Don't Know My Spouse's Information?
If you are divorced, separated, or living apart, first determine whether you must file as married.
Review the IRS filing status rules or use the IRS filing status tool if you are unsure which filing status applies.
If You Can File as Unmarried
File using the filing status for which you qualify, such as:
- Single
- Head of Household
- Qualifying Surviving Spouse
If You Must File as Married
Your spouse's information is generally required to electronically file a Married Filing Separately return.
What If My Spouse Does Not Live or Work in a Community Property State?
Community property treatment generally depends on the taxpayer's state of domicile.
If one spouse lives and earns income in a non-community property state, that income is generally not considered community income for federal tax purposes and typically is not allocated on Form 8958.
Because state laws vary, review your state's rules and IRS Publication 555 for additional guidance.
Frequently Asked Questions About Form 8958 and Community Property
Do I have to split all income when filing MFS in a community property state?
Generally, you must report:
- One-half of all community income
- All of your separate income
The classification of income as community or separate depends on state law.
Do I need Form 8958 if I file jointly?
No. Form 8958 is generally used when spouses or registered domestic partners file separate returns.
Is self-employment income split for self-employment tax purposes?
No. While the income may be allocated between spouses for income tax purposes, self-employment tax remains with the spouse who performed the services and operated the business.
Do Registered Domestic Partners use community property rules?
In some states, including California and Washington, community property laws may apply to Registered Domestic Partners. State-specific rules should be reviewed before filing.
Additional Resources
For more information, see: