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The nine community property states: and the fact that moving states changes the rules
Which state you live in determines who legally owns the money earned during the marriage. You never feel it day to day, but at tax time, buying a house, writing a will, and in the event of a divorce, the difference is fundamental.
The nine states
From IRS Publication 555:
"This publication is for married taxpayers who are domiciled in one of the following community property states. Arizona. California. Idaho. Louisiana. Nevada. New Mexico. Texas. Washington. Wisconsin."
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and WisconsinThese nine are community property states.
Source: IRS Publication 555
How the two regimes differ
- Community property states: earnings during the marriage are generally half each, regardless of who earned the salary or whose name the account is in
- Other states: equitable distribution(Equitable distribution): Division considers the length of the marriage, each person's financial situation and contributions, rather than mechanically splitting everything in half.
Note that "equitable" isn't "equal." Equitable distribution can land at 60/40 or at half, depending on the facts.
What it affects
- Taxes: married couples in community property states who file separately must split income in half, making separate filing far more complicated
- Property titling: how a house is recorded and in what form it's held (see item 60 of the checklist)
- Estate planning: what a will can dispose of differs
- Division on divorce
Moving states changes the rules
This is the most easily overlooked point.
Move from California to a non-community-property state and the character of property accumulated during the marriage can change. The reverse holds too: move from a common law state into a community property state and everything earned afterwards falls under the new rules.
As for assets owned before marriage or accumulated in another state, classifying them gets quite technical because states handle this kind of brought-in property differently.
It's worth one consultation before moving, especially if you own property or one income is markedly higher than the other.
A prenup can fix this in place
One of the practical values of a prenuptial agreement is specifying which regime applies regardless of where you live.
For a household whose work moves them through several states, that's much less trouble than consulting afresh at every move (see item 72 of the checklist).
What this means in a cross-border marriage
If one spouse is a Taiwanese national who hasn't naturalized, community property characterization intersects with gift tax. In a community property state, certain transfers may be treated as "already half each," while in other states they could be taxable gifts (see item 87 of the checklist).
That intersection is specialized; don't make the call yourself when large sums are involved.
In one line
Check first whether you live in one of those nine; and before moving to another state, ask once whether it changes the character of your property.