Individual state laws can complicate tax filing tremendously when spouses elect to file separate returns, and you'll want to make sure you get it right. If your wife earns $30,000 reported on a W-2, and if you wrongly include it on your return, you would have to pay taxes on it. If your wife also files a return and claims her W-2 income, she would pay taxes on it as well. The IRS would get a double dip – something you surely don’t want to see happen.
Common Law States
In common law states, the rules are clear. You would not report your wife's W-2 income on your return if you file separately, nor would you claim any 1099-MISC income she might have earned as a sole proprietor. You're only responsible for paying taxes on what you personally earned.
If you and your wife also have unearned income, such as interest generated from joint assets, the rules are less clear. Generally, if an account is jointly held and if your state says that you both have a right to half its value, you would each claim half the generated income. If you made disproportionate contributions to the asset, you should claim its unearned income commensurate with your contributions. This area of tax law is highly complicated, so you might want to seek the help of a professional if you have multiple jointly held assets.
Community Property States
If you live in one of the nine community property states – Arizona, Idaho, California, Texas, Nevada, Louisiana, Washington, Wisconsin or New Mexico – income is community property, treated as though you both earned it, regardless of which of you actually did so. Therefore, you must report half your wife's W-2 income on your separate return. She would also have to report half your earnings on her return. The same rule applies to unearned income. If either of you have any separate – not community – income, however, you would be solely responsible for reporting this. It does not have to be shared. Such income might include interest from an asset you owned prior to the marriage.
Deductions and Exemptions
After you figure out what income to report, you must also determine how you're going to allot deductions and exemptions. You can't claim an exemption for your wife if she has income that's been reported on a W-2. Complicated rules exist regarding dependents. If both you and your wife qualify to claim the same person as a dependent, you may have to negotiate to decide which of you will have this tax advantage. If your wife elects to itemize rather than use the standard deduction, you must do so also. This can effect deductions for mortgage interest, property taxes, medical expenses, and charitable contributions. Generally, the IRS says you can only claim deductions for expenses you paid personally from your own income. In the case of mortgage interest and property taxes, only the spouse who is legally liable for these expenses can deduct them, regardless of who paid them.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.