Residence of Spouse in no-tax NV doesn’t spare 50% community property share from CA tax where other spouse resident in CA

The recent CA Office of Tax Appeals case of In Re Matter of Appeal of Campbell, OTA Case No. 220911379 (5/24/2023) illustrates an unfortunate issue that arises when spouses live in different states and one or both states are community property states. There are presently 9 community property states in the United States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

The issue in this case was whether the community property share of a husband’s Nevada wage income earned during the 2017 tax year is California taxable income or not that was taxable to the California resident wife. Here, the Office of Tax Appeals concluded that this income was taxable in California reasoning that because the husband was domiciled in Nevada when the income was earned, and because Nevada is a community property state, the income in question is community property.

Where the income in question is community property, one-half of the income is attributable to each spouse and each spouse must report and pay tax on his or her respective one-half community property interest in the income. Thus, one-half of the community property income was attributable to the CA resident wife for tax purposes and taxable to her. In the event that NV imposed income tax on this income amount, CA may have provided a tax credit for the NV tax paid. Since NV does not impose any income tax, no credit was available. While this case involves an unusual fact pattern (spouses resident in different states), it illustrates an issue to be aware of when either spouse resides in a community property state.

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