Question

Describe the concept of community property versus the common-law allocation of property in a marriage. What determines which treatment a taxpayer has to use? How can two married couples with the same income be treated differently under each?

Answer 1

HI there,

Here is my answer to the question asked.

Common Law Property Versus Community Property :

Common-Law Property :

In all other states, common-law property rules apply. Put simply, this means that assets and debts you acquire during a marriage are yours alone — unless otherwise indicated by a title or other legal document. In some cases, this can make for an easier divorce: You both just keep the items that belong to you, and you only have to worry about dividing anything purchased together. It's not always that easy, though, since many married couples make a partnership of various assets and debts. Those shared assets and debts must be divided, typically in equitable fashion.

Here are some examples to illustrate who owns what in a common-law property state.

• You purchase a home together, and both of you appear on the mortgage and the deed: You own the property jointly.
• You purchase a home using your credit and funds, but you put the spouse on the deed: You own the property jointly.
• You purchase a home and only your name is on the title: You alone own the property.
• You earn money, but you deposit into a jointly held bank account: It becomes joint property.
• Your spouse buys a car using only their credit and income, and your name is not added to the paperwork or title: Only your spouse owns the car.

community property states :

In this, the assets of each spouse are considered assets of the marital unit. The assets of each partner in the relationship are not legally separate from those of the spouse. That is, while a couple is married, creditors of one spouse, with certain restrictions, can seize the assets of both spouses. In non-community property states, on the other hand, the assets of the debtor spouse are separate from the other spouse unless both spouses are indebted to the same creditor.

As of 2017, nine states follow community property rules. Those states are:

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

In a community property state, the law typically considers any assets acquired during a marriage to be the property of both spouses. It treats debt the same way — what you earn, save and spend in the marriage is irrevocably tied to the other person, in most cases. A few exceptions exist, mostly related to inheritances. Here are some examples to help you understand who owns what in a community property state marriage:

• You bought a house before the marriage: You own the house.
• You bought a house during the marriage, but you didn't put your spouse on the title: The house is still likely considered marital property.
• You earned money and saved it in a retirement account prior to marriage and never added anything else too it after marrying: Likely, the account remains your property.
• You earned money before marriage and put it in a savings account; during the marriage, you added other funds that were earned by either you or your spouse: All of the funds are now considered marital property.
• You receive $10,000 in inheritance held in a trust in your name: As long as the money is never mingled with community property, you remain the sole owner.

As a general rule, you can assume that any money you earn, any debt you incur, or any items you purchase during a marriage belong to both spouses if you are in a community property state.

Generally, when divorcing in a community property state, spouses split assets and debt 50/50 or along other agreed-upon — and hopefully fair — lines. Even when you both agree on the divorce and most of the details, it can be difficult to balance the division of property. Our divorce kit contains tools that help you ensure equitable distribution of both assets and debts.

How Can two married couples with the same income be treated differently under each :

If you get married, both you and your spouse continue to be treated as single people for tax purposes in that year. If, however, the tax you pay as two single people is greater than the tax that would be payable if you were taxed as a married couple, you can claim the difference a tax refund. Refunds are only due from the date of marriage and will be calculated after the following 31 December. So, for example, if you get married in 2020, any tax refund due to you will be calculated after 31 December 2020.

Refunds are normally only due where a couple are taxed at different rates and one spouse could benefit from the unused standard rate cut-off point or for some of the unused tax credits of the other spouse.

While the contemplation of marriage is largely a matter of the heart, there are often unavoidable federal and state tax implications for those who tie the knot. According to the Tax Foundation, a married couple's income may be subject to a penalty of up to 12% if they have children and up to 4% if they don’t.1 This model assumes taxpayers use standard deductions and report only wage income. But not every married couple faces marriage penalties. In fact, some may even enjoy marriage bonuses.

KEY TAKEAWAYS

• After marrying, some couples will take a tax hit, while others may enjoy a marriage bonus.
• Spouses with similar incomes—be they high or low—are more likely to experience marriage penalties.
• Couples with disparate incomes are more likely to experience marriage bonuses.
• The Tax Cuts and Jobs Act, effective as of the 2018 tax year, has made changes that both improve and worsen the impact of marriage penalties.

Marriage penalties aren’t merely a federal concern. According to the Tax Foundation, the following 15 states instituted a marriage penalty as of July 1, 2018, because their income tax brackets for married couples filing jointly are not twice as large as the brackets for single filers:

1. California
2. Georgia
3. Maryland
4. Minnesota
5. New Mexico
6. New Jersey
7. New York
8. North Dakota
9. Ohio
10. Oklahoma
11. Rhode Island
12. South Carolina
13. Vermont
14. Virginia
15. Wisconsin

The Marriage Bonus

Not every married couple suffers penalties. According to the Tax Foundation, spouses who file jointly can enjoy a 20% bonus on their combined marital income if they have children, while they may enjoy a 7% bonus if they are childless.1 This bonus commonly kicks in when one partner’s income is substantially higher than the other’s.

As a married couple filing jointly, the lower-earning spouse’s income doesn’t push the couple into a higher tax bracket. Rather, the couple benefits from the wider tax bracket applying to married couples. They may pay taxes at a lower rate as a result. Furthermore, the lower-earning spouse may receive contributions to a spousal IRA, courtesy of the higher-earning spouse.

Conclusion :

Few couples base their marriage decisions on the tax consequences that may result. But realistically, marriage does influence how much each spouse will work after they walk down the aisle. A Congressional Budget Office study from 1997 showed that higher-earning spouses were motivated to work 0.1% to 0.3% more, while lower-earning spouses were motivated to work an average of 7% less than their single days.There is no denying that marriages can greatly affect tax implications. Couples should be mindful of the changes they may face and plan accordingly.