There are currently nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Under the laws of these states, one half of the income and property earned and acquired by spouses during their marriage is generally deemed to belong to each spouse, no matter in whose name the legal title is held.

Although property rights are fixed by state law, the federal taxation of income flowing from those property rights is determined by federal law. When the highest court of a state (usually its supreme court) has made a decision on an issue of property ownership, that decision controls the federal courts for income tax purposes.

The domicile of a married couple determines whether community property laws apply for federal income taxation purposes. Domicile is defined as the permanent home of a taxpayer, which is not necessarily the same place as the taxpayer's current address. The intent of the taxpayer is key in deciding where he is domiciled, and factors considered by the Internal Revenue Service include a consideration of the state where the individual pays income taxes, votes, owns real estate; length of residence; and business and social ties to a community. It is possible for a taxpayer to have community income while living in a non-community state because the question of community income is tied to domicile or permanent home and not necessarily to his current address.

Property, both real and personal, that was owned by one spouse prior to a marriage is treated as the separate property of that spouse. The status of the property as separate or community is determined as of the date of acquisition, and property continues to be separate through all changes to it so long as it can be traced. Spouses can agree to convert investments to community property. The treatment of income arising from separate property during the marriage varies from state to state. Some states treat the income as community property income, while in others the income from separate property belongs to the individual owner.

If a married couple domiciled in a community property state files separate income tax returns, one-half of the community income must be reported by each spouse unless they lived apart for the entire calendar year, at least one spouse had earned income during the year, and none of the earned income was transferred between the spouses during the year.

A married spouse who files a separate return may be relieved of tax liability on community income that is attributable to the other spouse if he qualifies for innocent spouse relief. The IRS may grant relief if the aggrieved spouse proves that he did not know nor did he have reason to know about the income and that it would be inequitable under the circumstances for him to be taxed on that income. In addition, the IRS is permitted to grant relief if it would be generally inequitable to hold the taxpayer liable.

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