Texas Community Property Tax Return Tips

Texas is a community property state. That one fact can change how married couples record wages, business profits, investment income, deductions, credits, and even capital gains on a federal return. It also affects basis at death and during divorce. This guide explains how community versus separate rules work for Texas residents, how income and deductions are split when you file, what to do when spouses live or earn in multiple states, and why the right allocations can lower overall tax. I will also show where Form 8958 fits, how to handle withholding and estimates, and common traps I see as a Texas CPA. Use this as a starting point, then talk with a professional about your specific facts.

How Texas defines property

Under Texas law, property is either community or separate. Community property generally includes the earnings of either spouse during marriage and the income from property owned during marriage. Separate property usually includes what a spouse owned before marriage and what a spouse receives during marriage by gift, devise, or descent. In Texas, the appreciation of separate property stays separate, but the income from that separate property is usually community. Spouses can sign a valid premarital or marital property agreement to reclassify property or its income. The Texas Constitution and Family Code set these rules, and courts rely on tracing when character is disputed.

The default Texas rule that income from separate property is community is different from many other states. Real estate rents, stock dividends, interest on bank accounts, and similar cash flows that come from a separately owned asset are usually community in Texas. There are special oil and gas rules. A royalty from a separate mineral interest is often separate because it is considered a return of corpus. Delay rentals are usually community. Because results turn on legal character, wording in leases and deeds matters. If you have minerals, this point is worth its own review.

For a deeper legal reference, see Texas Constitution Article 16 Section 15 and Texas Family Code Chapter 3. The IRS applies federal tax rules on top of state property law. State law defines who owns the income. Federal law then decides how that income is taxed on the return.

Why this matters for taxes

Texas has no personal income tax, but federal returns still apply community rules when you are domiciled in Texas. If you file a joint return, everything is combined anyway, but character still matters for basis, passive activity rules, and planning during divorce or death. If you file married filing separately, community rules can change who reports what. In a community property setting, a separate return for one spouse generally shows half of community income and deductions, plus that spouse’s separate items in full. This can lower exposure to phaseouts or the net investment income tax if structured properly. The IRS sets out these rules in Publication 555 Community Property.

Community rules also control which spouse reports withholding, estimated tax payments, and credits. Many couples are surprised to learn that the W 2 withholding shown under one spouse’s Social Security number may be split between both spouses on separate returns if it came from community wages. The same concept applies to estimated tax payments from a joint account funded with community earnings. Planning is about tracking, documentation, and making clear elections where allowed.

Community income allocation

At a high level, community income is split equally between spouses when filing separate federal returns while domiciled in Texas. Separate income remains with the spouse who owns it. The classification of the source tells you where to start. When in doubt, gather the facts that show inception of title, the marital agreement if any, the funding source, and how accounts were handled. Below is a quick orientation. Texas law has many exceptions, so confirm with your advisor if your facts vary.

Item	Texas character	Reporting on separate federal returns
Wages and salaries earned during marriage	Usually community	Split equally between spouses
Self employment income from a business started during marriage	Usually community	Split equally between spouses, with special steps for Schedule C and self employment tax
Income from separate property like interest, dividends, rents	Usually community in Texas	Split equally between spouses
Appreciation of separate property	Separate	Allocated to the owning spouse
Oil and gas royalty from separate mineral interest	Often separate	Reported by owning spouse
Delay rentals on a mineral lease	Usually community	Split equally
Gifts or inheritances received during marriage	Separate	Reported by recipient spouse if taxable
Retirement plan distributions	Depends on plan and contributions	Often split based on community share inside the account

IRS Publication 555 gives allocation examples and cites Internal Revenue Code section 879 for treatment of certain items for nonresident aliens. The form used to present the split when filing separately is Form 8958 Allocation of Tax Amounts Between Certain Individuals in Community Property States. The instructions to Form 8958 walk through wages, business income, and withholding splits. See IRS Publication 555 at irs.gov/publications/p555 and Form 8958 instructions at irs.gov/forms-pubs/about-form-8958.

Wages and self employment

Wages earned by either spouse while domiciled in Texas are usually community. If you file separate returns, you split those wages equally even though the W 2 is issued under one Social Security number. The same split generally applies to withholding and Social Security and Medicare taxes taken from those wages when you complete Form 8958. Keep copies of paystubs and a simple worksheet that shows the split, in case the IRS questions why your reported wage income differs from the W 2 line shown under your name.

Self employment often gets messy because a Schedule C or single member LLC can be funded with a mix of separate and community money. If the business was formed during marriage and operated with community effort, profits are usually community. When both spouses are active owners, and you file a joint return, you may qualify for the qualified joint venture election. With that election, you split income and deductions across two Schedules C and two Schedules SE instead of filing a partnership return. If you file separate returns, the community split may still apply, but the filing mechanics differ. Rev. Proc. 2002 69 gives guidance for community property business ownership classification. A quick check with a CPA can prevent Schedule C and self employment tax errors that are hard to fix later.

Investments and rentals

Many Texas couples own investments or rental properties where title, funding, and reinvestment have changed over time. If the rental house was purchased during marriage with community funds, the rental income and deductions are community. If one spouse owned the property before marriage, rents are usually community in Texas unless there is a valid agreement that makes income from separate property remain separate. The depreciation deduction follows the same classification. If the property was refinanced with a mix of separate and community funds, you may need a tracing schedule to allocate interest and basis. For brokerage accounts, interest and dividends during marriage are usually community even if the account is titled in one name and began as separate, unless there is a valid agreement to the contrary. Capital gains on a sale will follow ownership and community shares. Separate basis and community basis can sit inside the same asset when there has been commingling. Good recordkeeping makes a large difference when you sell or divide property in divorce.

Retirement and benefits

Retirement assets have both plan level rules and community property rules. Contributions from community wages generally create a community interest in the account. Later distributions are often split between community and separate shares based on service time and contributions. Qualified domestic relations orders during divorce will spell this out. For a joint return, the total distribution is combined. For separate returns, each spouse reports their share of the taxable portion and any withholding attached to that distribution. Traditional and Roth accounts have different tax results, but the community classification process still applies.

Filing status choices

Texas couples usually file joint returns for simplicity and to use credits that are limited on separate returns. But joint filing is not always the right choice. If one spouse has high medical expenses, miscellaneous deductions, or separate losses, a separate filing may produce a lower total. If you choose married filing separately while domiciled in Texas, you generally must apply community property rules and file Form 8958. If you qualify as head of household and lived apart from your spouse for the last six months of the year with a dependent in your home, community rules can be suspended under Internal Revenue Code section 66 for that year. IRS Publication 504 Divorced or Separated Individuals explains head of household and special rules for spouses who live apart. See irs.gov/publications/p504.

Nonresident alien spouses change the options. A U S person married to a nonresident alien can elect to treat the nonresident as a U S resident for the full year and file jointly, or file separately and apply IRC section 879 and section 66 to determine what community income, if any, is reported by the U S spouse. These choices carry withholding, credit, foreign asset reporting, and treaty issues that merit a separate review.

Married filing separately steps

When a Texas couple chooses separate returns, the process is straightforward once your facts are clear. First, confirm Texas domicile during the year, since domicile controls whether community rules apply. Second, classify assets and income sources as separate or community. Third, split every community line item equally, including wages, business income, investment income, deductions paid from community funds, and withholding and estimated payments. Fourth, allocate separate items in full to the owning spouse. Fifth, complete and attach Form 8958 to each return. Label and retain your workpapers so you can support the split later if requested.

Some items deserve special attention. Health insurance marketplace advance credits, education credits, child tax credits, and dependent care credits all have eligibility rules that work differently on separate returns. Some credits are not allowed on separate returns. Decide early which spouse will claim each child and which spouse will itemize if one does. The standard deduction can only be used by both or by neither if one itemizes. Housing deductions like mortgage interest and property taxes are often paid from joint accounts that hold community funds, which means the deduction will usually be split on separate returns even if the mortgage is under one spouse’s name.

Deductions and credits

Texas couples often ask whether the mortgage interest goes to the spouse whose name is on the loan or whether the charitable deduction goes to the spouse who wrote the check. In a community property setting, the tax deduction follows who actually paid and the character of the funds used. Payments from community funds generally produce community deductions that are split when you file separately. When payments are made from separate funds, the deduction follows the paying spouse. To support your position, keep bank statements that show the account used and whether that account holds community or separate funds. For donations of property, keep the appraisal and the acquisition history so you can show separate or community status if asked.

Credits often follow the qualifying person. Education credits depend on who is the student and who paid the tuition. The child tax credit and dependent care credit depend on the dependent and residency. On separate returns, credits are limited and planning early in the year can help. Set who will claim which child, align payments accordingly, and document. When you file jointly, these allocation questions fall away, but the character still matters for basis and planning during divorce or death.

Withholding and estimates

Withholding from community wages and estimated payments made from community funds are community items. On separate returns, you split them equally, regardless of whose name appears on the W 2 or which spouse sent the estimated payment. Attach Form 8958 and keep a simple schedule that ties to each payment. If one spouse has mostly separate income and the other does not, consider adjusting Form W 4 or setting estimated payments in both names from a joint account so that the split is clear. If you are aiming to reduce an estimated tax penalty, use Form 2210 annualized method when income is uneven across quarters.

Basis, gains, and losses

Basis drives gain or loss and depreciation. In a Texas community property system, basis can be a mix of community and separate if an asset was acquired with both types of funds or if it was improved with one type while owned as the other. For example, a house bought during marriage and improved later with inherited funds may have mixed basis. Keep records of cost, improvements, who paid, and when. If you sell community property and file separate returns, each spouse reports half the gain or loss. If you sell separate property, the owning spouse reports the entire gain or loss. For passive activity losses on rentals, the allowable loss follows ownership and community shares and is limited by passive rules and basis.

Death and step up in Texas

Texas community property receives a special basis rule at death under Internal Revenue Code section 1014. If at least one half of community property is included in the decedent’s estate, both halves of that community property can receive a basis adjustment to fair market value at death. This is often called the double step up for community property. To qualify, the property must be community and the decedent’s share must be included in the estate. This can create real tax savings for the surviving spouse, especially with low basis real estate and brokerage accounts held as community. Keep valuation reports and title records to support the new basis. Property that is separate receives a basis adjustment only on the decedent’s share. Trust planning and marital agreements can change results, so coordinate with your estate attorney and CPA well before a sale.

Divorce and separation rules

Texas does not have legal separation, so living apart does not, by itself, end the community. Income remains community until divorce or until a valid marital agreement changes character, except for the special federal rule for spouses who live apart for the entire year and meet the head of household test. During divorce, the court will divide community property and may order support and reimbursements. Federal tax law under Internal Revenue Code section 1041 allows tax free transfers between spouses or former spouses if incident to divorce. Basis carries over to the receiving spouse in those transfers. That means a later sale may trigger gain that ties back to the original cost and adjustments. Keep copies of QDROs, divorce decrees, and property division schedules. Post divorce, new earnings are separate and new investment income is separate unless a new marriage creates a new community. If you receive alimony under a pre 2019 divorce, it may be taxable to you and deductible by the payor. For divorces finalized after 2018, alimony is not taxable to the recipient nor deductible by the payor for federal purposes.

Multi state couples

Many Texas couples work in other states or move during the year. Community property rules follow domicile. If you are domiciled in Texas, wages earned in another state are still community for federal purposes. You may also need to file a nonresident return in the work state. Some noncommunity states do not apply community splits on their returns. Others do. This can create mismatches. A spouse domiciled in Texas married to a spouse domiciled in a separate property state may need special allocations. Keep good travel and residency records and decide early which state considers you a resident. If you moved into or out of Texas midyear, segment your income by period of domicile and classify accordingly. Coordinate with a CPA who handles both states so that the federal and state positions are consistent.

Nonresident alien spouse

When one spouse is a nonresident alien, special federal rules can override community splits. Internal Revenue Code section 879 assigns certain community income to the U S spouse. IRC section 66 can also apply limited relief. The couple can elect to treat the nonresident as a U S resident for the year and file jointly, or the U S spouse can file separately. This choice affects credits, withholding, and reporting of foreign accounts and assets. Publication 519 U S Tax Guide for Aliens and Publication 555 both address these choices. Because these cases involve treaty and disclosure questions, get advice before filing. See irs.gov/publications/p519.

Small business choices

Texas spouses who run a business together often ask whether they need a partnership return or whether they can use the qualified joint venture rules. If you file a joint return and both materially participate, a qualified joint venture can simplify filings by allowing separate Schedules C and separate self employment tax, without a partnership. In a community property setting, Rev. Proc. 2002 69 also provides a way to treat a business as owned by each spouse without forming a partnership. If you file separate returns, the community split and who materially participates drive passive versus nonpassive treatment. If an S corporation is involved, confirm stock ownership and wages paid to each spouse. For a partnership, the K 1 items follow the partner who owns the interest, but if the interest is community, the tax effect is split on separate returns. Keep operating agreements and ownership records current so the tax allocations match reality.

Records and agreements

Good records are the backbone of community property tax reporting. Keep these items in one place for each year. Bank and brokerage statements for accounts that show whether funds are community or separate. Closing statements, deeds, and loan documents for real estate. Stock grant and retirement contribution records for employment benefits. Mineral leases and division orders if you own oil and gas interests. Signed premarital or marital property agreements and any partition or exchange agreements. If you want income from separate property to remain separate, Texas law allows spouses to agree to that in writing. A valid agreement must meet Texas legal formalities. Once signed, keep the agreement with your tax records and maintain separate accounts to avoid commingling. Without clear records, audits and divorces get more expensive and tax results often tilt against the taxpayer.

Common pitfalls I see

Reporting all wages under the earner on separate returns even though Texas community rules split them. Forgetting to split W 2 withholding and estimated payments on separate returns. Mixing separate and community funds in the same account without records, then selling an asset and guessing at basis. Missing the double step up on community property at death and paying tax on gain that should have been wiped out. Claiming the wrong filing status when spouses lived apart, or claiming head of household without meeting the residency test for a qualifying person. Ignoring the oil and gas rule that treats royalties from a separate mineral interest as separate in many cases. Not using Form 8958 to show the split and leaving the IRS to guess what you did. All of these are solvable with planning.

How a Texas CPA can help

As a Texas CPA, I help couples classify property, build an allocation schedule that fits the law, and choose a filing status that supports their goals. For married filing separately, I prepare Form 8958 and attach clear workpapers, split withholding and estimates correctly, and coordinate with both spouses so the two returns tie out. For joint filers, I focus on basis, passive activity tracking, and planning for future sales, divorce, or estate goals. For multi state couples, I coordinate the federal return with nonresident work state returns and help you avoid double tax. For divorce, I work with your attorney to draft tax smart division schedules and QDRO language and to avoid surprises with deferred compensation, stock units, and retirement transfers. If you are dealing with an IRS notice, I respond with the allocation detail the IRS wants to see and resolve the issue quickly.

Key IRS and Texas resources

IRS Publication 555 Community Property: irs.gov/publications/p555

IRS Form 8958 and instructions: irs.gov/forms-pubs/about-form-8958

IRS Publication 504 Divorced or Separated: irs.gov/publications/p504

IRS Publication 519 U S Tax Guide for Aliens: irs.gov/publications/p519

Texas Constitution Article 16 Section 15: statutes.capitol.texas.gov

Texas Family Code Chapter 3 Marital Property: statutes.capitol.texas.gov/Docs/FA/htm/FA.3.htm

Texas Comptroller residency and taxes overview: comptroller.texas.gov

FAQ

Do Texas community rules apply if we file jointly?

Yes, but the impact is mostly under the surface. Your joint return includes all income and deductions either way. Community versus separate still affects basis, passive loss tracking, estate planning, and divorce planning.

We lived apart all year in Texas. Can I file head of household?

Maybe. If you meet the IRS tests for spouses living apart, had a qualifying person living in your home more than half the year, and paid more than half the cost of keeping up that home, you may file head of household. Community property rules can be suspended for that year. See IRS Publication 504.

My spouse worked in California and we live in Texas. Do we still split those wages?

For federal reporting, yes, if you were domiciled in Texas. You may also need to file a nonresident California return for the earner. California will tax the wages, and Texas has no personal income tax. The federal return still uses the community split.

Who reports the W 2 withholding on separate returns?

Withholding from community wages is a community item, so it is split equally on separate returns. Use Form 8958 to show the allocation.

Does rental income from my premarital house belong to me alone?

In Texas, rent received during marriage from a separate property home is usually community unless a valid marital agreement makes that income separate. The appreciation of the house remains separate.

Do both halves of our community property get a basis step up when one spouse dies?

Often yes. If one half of community property is included in the decedent’s estate, both halves can receive a basis adjustment. Keep valuation records to support the new basis.

Can we avoid a partnership if we run a business together?

If you file a joint return and both materially participate, you may qualify for the qualified joint venture election. In community settings, guidance also allows certain sole proprietor treatment without a separate partnership return. Facts matter, so check with a CPA.

Do I need Form 8958 if I file married filing separately?

Yes, if you are domiciled in a community property state like Texas. Form 8958 shows the split of community income, deductions, credits, and payments between spouses.

Practical tips for Texas couples

Decide early in the year whether you will file jointly or separately. If separate, set up a simple spreadsheet to track community versus separate income and payments. If you want income from separate property to remain separate, work with an attorney to update your marital agreement and keep that income in a separate account. For multi state couples, map out the federal treatment and how each state will view the same income. Before selling assets, confirm basis and whether a step up is available. For divorcing couples, schedule a joint session with your CPA and family law counsel to align on division, QDROs, and who will claim each child. For oil and gas owners, gather deeds, division orders, and lease terms to confirm whether receipts are separate or community.

Work with Alviso, CPA in Texas

Community property can be a strength for planning if you handle the details. If you want a Texas specific review of your texas community property tax return, income splits, and Form 8958, my firm can help. I work with wage earners, business owners, investors, and multi state families. We will classify assets and income, build a clear allocation schedule, pick a filing path, and prepare clean workpapers so your return stands up to questions. Reach out to Alviso, CPA to schedule a call and put a plan in place before year end.