In marriage, two people are united. They may share the same name, residence, children, and – in many cases – income. The ideology of being united as a marital community is, in a way, also true when it comes to the couple’s property. In California, all property (with few exceptions) acquired during the marriage becomes part of a marital community with each spouse having 50 percent ownership. This concept is known as community property. Statutes based on the same general concept govern community property, although some deviations exist between states. Community property is usually defined as all property acquired during the marriage, except for property acquired through gift, inheritance, or due to personal injury.
Each spouse retains the aforementioned excepted property as separate property, together with any property acquired before the marriage. However, in Texas,* separate property includes property acquired after marriage by a spouse by gift, devise, or descent and the recovery for loss of earning capacity. Also, in Washington, property received after marriage is only separate property if acquired by gift, bequest, descent, or inheritance, including the rents, issues, and profits.
IRS Tax Liens Encumbering Community Property
The state’s community property laws usually are applied in determining the ownership of property acquired by a couple when they lived in the state. Most states have a rebuttable presumption that property acquired during the marriage is community property. For example, in Wisconsin, all property of spouses is presumed to be marital property, while in New Mexico, property acquired by either of the spouses or both during their marriage is presumed to be community property.
Suppose a state law provides for a taxpayer’s ownership interest in community property. The tax lien will attach to the ownership interest of the liable taxpayer. Moreover, the tax lien can be enforced against community assets even if the property is under the name of the non-liable spouse. For example, the IRS can levy against the non-liable spouse’s wages to reach the taxpayer’s 50 percent ownership in those wages.
State Law Exemptions
Some states have statutory provisions intended to protect a spouse from the other spouse’s creditors. These statutory provisions limit the community property from which the creditors can collect. However, in a Supreme Court decision (United States v. Mitchell, 403 US 190 (1971), these statutory provisions are like state law exemptions, ineffective against the federal government. In application, if a liable spouse has a property interest in assets that are not available to the responsible spouse’s other creditors under state law, the federal tax lien will still attach to the property, and the IRS can reach it.
On the other hand, state law will most of the time allow a creditor to reach portions of the community property owned by the non-liable spouse to satisfy the debt of the liable spouse. When state law makes the property available to the liable spouse’s creditors, the IRS may reach that property even though the federal tax does not attach to it because it is not the taxpayer’s property or rights to property.
*Tax attorney Jin Kim is licensed to practice law in California. All information contained in this blog article is for general informational purposes only and should not be construed as legal advice.
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