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 spouse's W-2 income on your separate return. He/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.
After you figure out what income to report, you must also determine how you're going to divide 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 spouse 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 affect 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.
