Income is treated the same as any other kind of property.
General rule and example
- All income earned that either spouse earns is community property:
- Unless otherwise specified in a written agreement between the spouses.
- So long as both spouses are domiciled in a community property state.
Income that comes from community property — such as the sale of real estate — follows this general rule.
Income that comes from separate property can also be community property.
Phil and Yvonne are Idaho residents and are domiciled in Idaho. Phil earned $30,000 in wages. Yvonne earned $60,000 in wages.
Phil also inherited some stock. The stock is only in his name. He kept the stock and the dividend income from the stock separate from the community funds. The stock generated $10,000 in dividend income for Phil.
Phil and Yvonne file “married filing separately.”
If no written agreement exists
If no agreement exists regarding the stock and the dividend income, Phil and Yvonne each report $50,000 of income ($15,000 from Phil’s wages, $30,000 from Yvonne’s wages, and $5,000 from the dividend income).
If a written agreement exists
If there’s a written agreement that the income from dividends is separate income, the $10,000 retains its separate nature.
- Phil reports $15,000 from his wages, $30,000 from Yvonne’s wages, and $10,000 dividends, for a total of $55,000.
- Yvonne reports $15,000 from Phil’s wages and $30,000 from her wages, for a total of $45,000.
Miscellaneous types of income
Real estate income
Income from real property (real estate) can be either separate or community income. It depends on the laws of the state where the property is located. Unless otherwise agreed to by the spouses in writing, income from real estate located in Idaho is community income. This is true regardless of where you and your spouse are domiciled and whether the property is separate or community property.
For example, the real property is in Idaho and both you and your spouse are domiciled in a separate-property state. Idaho treats the income from the real property as community income.
Withdrawals from IRAs and ESAs
Distributions from individual retirement accounts (IRAs) and Coverdell Education Savings Accounts (ESAs) aren’t taxed according to the normal community-property rules. Distributions from these accounts are taxable only to the spouse who receives the income.
Retirement plan and pension income
Generally, distributions from retirement plans and pensions are considered community income or separate income based on both these factors:
- Periods of participation in the retirement plan or pension while you were married
- Where the employee (you or your spouse) was domiciled during these periods
If you’re married and domiciled in Idaho during the participation period, the distributions will be community income.
QDROs
The right to receive retirement income is sometimes specifically addressed in a qualified domestic relations order (QDRO) when there’s a divorce or legal separation. The order awards a spouse or former spouse part of the retirement plan benefits as if he or she was the plan participant. For more information on QDROs, see IRS Publication 575.
Exceptions to community income
Internal Revenue Code (IRC) section 66 provides exceptions regarding when it treats certain community income as separate income:
- IRC section 66(a): You and your spouse lived apart for the entire year, aren’t filing a joint return for that year, one or both of you had earned income for the year that is community income, and no portion of the earned income was directly or indirectly transferred between you before the end of the year.
- IRC section 66(b): Community property laws will be disregarded and the income will be treated as the separate income of a person who acted as if an item of community income was solely his or hers, and who failed to notify his or her spouse of the nature and amount of the income before the due date of the return, including extensions, for the year the income was earned.
- IRC section 66(c): Either you or your spouse didn’t know of, and had no reason to know about an item of community property earned by the other spouse, you aren’t filing a joint return for that year, and considering all facts and circumstances it’s inequitable to include that item of community income in you or your spouse’s gross income.
These subsections could be relevant because federal taxable income is the starting point for calculating your Idaho taxable income. (See Idaho Code section 63‑3011C.) Very specific conditions must exist, so read IRC section 66 carefully. See IRS Publication 555, Community Property, the “Community Property Laws Disregarded” section.