US Tax Preparation for American Expats: Community Property

An American in London who files married filing separately with a non-US spouse may still be governed by community property law, because the test is domicile, not residence. Where it applies, section 879 keeps earned income with the spouse who earned it but divides most investment income from community assets equally, changing what the American return must report.

US tax preparation for American expats is usually discussed as a question of filing status, exclusions and credits. For a Californian, Texan or Washingtonian married to a British, European or other non-US spouse, there is an earlier question that almost every self-prepared return skips: whose income is it? At Jungle Tax we prepare US and UK returns for executives, founders and families with exactly this profile, and the community property analysis regularly moves six-figure amounts of income on or off the American spouse’s return. This guide sets out how the rules work, where they interact with the UK return, and how earlier years are put right.

Does community property law still apply when you live in London?

For federal income tax purposes, the character of a married person’s income as community or separate is decided by the law of the place where they are domiciled. The IRS says so directly in Publication 555, Community Property, which lists the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Domicile is your permanent legal home, the place you intend to keep indefinitely and return to. It is not where you happen to live this year. Publication 555 points to factors such as where you pay state income tax, where you vote, where you own property, how long you have lived in a place and the strength of your business and social ties. A partner seconded from Palo Alto to Mayfair on a three-year assignment, with a house kept in California and a clear intention to return, has very probably not abandoned a California domicile. A founder who sold up in Austin a decade ago, bought in Notting Hill and intends to stay has very probably acquired an English one.

State domicile is not UK domicile

British-resident Americans often assume they have already answered this question for HMRC. They have not. The UK common-law concept of domicile and the US state-law concept use the same word and broadly similar ideas, but they are applied by different authorities for different purposes, and since 6 April 2025 the main UK personal tax regime for new arrivals has turned on residence history, not domicile. A conclusion reached for one system is evidence, not an answer, for the other.

When only one spouse has a community property domicile

Mixed-nationality couples are frequently mixed-domicile couples. The American spouse may remain domiciled in California while the British spouse has never been domiciled anywhere but England. In that case the two halves of the household can be governed by different property systems: the American’s acquisitions during marriage are tested under California law, and the British spouse’s under English law, which has no community property regime during marriage. The result is asymmetric, and it is one reason a software questionnaire cannot resolve the point.

If you moved from a community property state

Changing domicile stops new community property from arising. It does not usually re-characterise what already exists. Investments bought with marital earnings while you were domiciled in Seattle or Houston generally remain community property after you settle in England, and each spouse continues to own half of the income they produce. For long-married couples the preparation task is therefore a tracing exercise: which assets were acquired when, with what funds, and under which domicile.

Foreign community regimes count too

Section 879 defines community property laws to include those of a foreign country as well as a US state. An American in London married to a French or Spanish national under that country’s default matrimonial regime may have community income even though neither spouse has any connection with a US community property state. England and Wales, Scotland and Northern Ireland are separate property systems, so a couple who are both domiciled in the UK and married without a foreign regime generate no community income at all.

How does section 879 allocate community income when one spouse is a nonresident alien?

Ordinary community property law would have each spouse report half of all community income on a separate return. Congress recognised that this produces odd results when one spouse is outside the US tax system altogether, and section 879 overrides the state-law split for the most important categories. It applies whenever a married couple has community income, one or both spouses are nonresident aliens, and no election to file jointly is in force.

Type of community income	Ordinary community property rule	Section 879 result with a nonresident alien spouse
Earned income: salary, bonus, equity compensation, fees for personal services	Half to each spouse	All to the spouse who performed the services
Trade or business income	Half to each spouse	To the spouse carrying on the business; if both operate it, by their respective shares
Partner’s distributive share of partnership income	Half to each spouse	All to the spouse who is the partner
Income from one spouse’s separate property	Depends on the state: separate in some, community in others	All to the spouse who owns the property
All other community income: dividends, interest, rents and gains from community assets	Half to each spouse	Follows community property law, so generally half to each spouse

Publication 555 reaches the same place by a different route. It tells a US citizen married to a nonresident alien, who has not elected to treat that spouse as a US resident, to treat community income under the rules for spouses living apart all year, without having to meet the conditions that domestic couples must satisfy. The practical instruction is identical: earned income stays with the earner, and only the residual category is divided.

The separate property line matters more than it looks. In Idaho, Louisiana, Texas and Wisconsin, income from most separate property is itself community income under state law. Section 879 switches that off for these couples: income from an asset one spouse owned before the marriage is attributed to that spouse alone.

What does this do to the American spouse’s reported income?

Three consequences follow, and they pull in different directions.

Your earned income is entirely yours. Salary, bonus, restricted stock vesting, carried compensation for services and self-employment profits are reported in full by the American who earned them. The non-US spouse’s UK salary is never brought on to your return. The most common error we see in self-prepared returns is the opposite: tax software detects a community property state, generates an allocation worksheet, and halves the American’s wages with a spouse who files no US return. Half the salary then vanishes from the US tax base. That is an understatement of income, not a planning technique.

Investment income from community assets is divided, whatever the account title says. A brokerage account in your sole name, funded from earnings during the marriage while you were domiciled in a community property state, is a community asset. You report half of its dividends, interest and gains. Your spouse owns the other half. Equally, an account in your spouse’s sole name that is community property under the governing law produces income of which half is yours, and it belongs on your Form 1040 even though no statement has ever been issued to you.

Your spouse’s half has its own US character. Half of the foreign-source income of a community asset, attributed to a nonresident alien, is outside US tax. Half of the US-source dividends is not: in principle it is US-source income of a nonresident alien, subject to the withholding regime for nonresidents and to the dividend article of the US-UK treaty. Because the custodian reports everything under the American’s Social Security number, the return needs a clear nominee-style reconciliation between what the Form 1099 shows and what is reported.

A worked illustration

Take an American managing director in London, domiciled in California, married to a British consultant who has always been domiciled in England. She earns the equivalent of $520,000. A US brokerage account in her sole name, built entirely from bonuses saved during the marriage, yields $60,000 of dividends and interest. Her husband earns £150,000 and holds a UK investment account built from his own earnings.

• Her salary: $520,000 reported in full on her return. Section 879 attributes earned income to the person who earned it.
• Her brokerage income: the account is community property under California law, so $30,000 is hers and $30,000 is her husband’s.
• His salary: his alone, and outside the US system.
• His investment account: acquired by an English domiciliary under English law, it is his separate property, so none of its income is attributed to her.

A self-prepared return for this couple will typically show either $60,000 of investment income with no allocation, or $260,000 of wages after a mistaken split. Neither is right. If both spouses were California domiciliaries, the husband’s account would be community property as well, and half of its income would be hers to report.

Where Form 8958 fits

Form 8958 is the IRS form for allocating tax amounts between spouses with community property rights who file separate returns. Where the only community income is salary, section 879 leaves nothing to divide. Where investment, rental or gain income is being halved, we attach the form with a short statement identifying the domicile, the governing property law, the nonresident alien status of the spouse and the section 879 category applied to each line. The non-US spouse usually has no return for the IRS to match against, which makes that statement the principal record of why the figures differ from the information returns.

Assets to report, not only income

Form 8938 treats you as having an interest in a foreign financial asset if income or gains from it would be reportable on your return. A community half-interest in a UK account held in your spouse’s name can therefore count towards the Form 8938 thresholds, and whether the same account belongs on your FBAR needs to be considered on its own terms. Preparers who never ask about domicile never reach this question.

How do community property rules interact with the foreign earned income exclusion and foreign tax credit?

Foreign earned income exclusion

The exclusion is computed spouse by spouse. The regulations under section 911 determine each spouse’s excludable amount on the basis of the income attributable to that spouse’s own services, without regard to community property laws. An American spouse cannot use any part of a non-US spouse’s exclusion, and community property does not create a second limit. The maximum exclusion is $130,000 for 2025 and $132,900 for 2026. It applies only to earned income, so it never touches the investment income that community property law divides.

Foreign tax credit

For most Americans in Britain the credit, not the exclusion, does the heavy lifting, because UK rates on employment income generally exceed US rates. Community property introduces a mismatch that needs proper analysis. The US credit belongs to the person on whom foreign law imposes the tax. HMRC taxes each spouse on income determined under UK rules, not under California’s. Two situations arise:

• You pay UK tax on all of the income from an account in your name, but report only half of that income to the IRS. The UK tax on the other half relates to income that is not in your US tax base, and the passive-category limitation has to be computed accordingly.
• You report half of the income from a community asset in your spouse’s name, but HMRC charged the tax to your spouse. Income has arrived on your return without an obviously creditable tax attached.

Neither outcome is automatically adverse, but both must be worked through line by line. It is the part of the return where an understanding of the UK computation is indispensable, and where our US-UK tax accountants prepare both countries’ returns from a single reconciled set of figures.

Net investment income tax

The 3.8% net investment income tax applies to a separate filer once modified adjusted gross income exceeds $125,000, and it is generally not reduced by foreign tax credits. Because community property law can halve the investment income attributed to the American spouse, a correct allocation feeds directly into this charge, in either direction.

The married filing separately thresholds that follow

Without a joint election, and unless head of household is available, the American spouse files married filing separately. That status carries the least generous thresholds in the Code, which is why getting the income figure right matters so much.

Item	Married filing separately
Filing requirement	Gross income of $5 or more
Standard deduction (2026)	$16,100
Net investment income tax threshold	$125,000
Additional Medicare tax threshold	$125,000
Net capital loss deduction	$1,500 a year
Form 8938 threshold, living abroad	$200,000 at year end or $300,000 at any time
FBAR threshold	$10,000 aggregate, regardless of filing status

The rate bands for separate filers are half the joint bands, so the top federal rate is reached at roughly half the joint threshold. A family that meets the tests may do better as head of household, which we cover in our guide to head of household with a non-US spouse.

Is the section 6013(g) election a way out?

Briefly: it removes the community property question and replaces it with a larger one. Section 879 does not apply while an election under section 6013(g) or (h) is in force. The couple files jointly, the split becomes irrelevant, and the joint thresholds return. In exchange, the non-US spouse is treated as a US resident for income tax purposes, their worldwide income becomes reportable, and their UK accounts, pensions and investment funds come within US reporting. The IRS explains the mechanics on its nonresident spouse page, including the point that once the choice is ended neither spouse can ever make it again. We deal with that decision in full in our guide to the non-US spouse election; for households with substantial UK assets in the non-US spouse’s name it is rarely the answer to a community property issue.

How does the UK return treat the same couple?

The United Kingdom has taxed spouses independently since 6 April 1990. There is no joint return and no household unit. Each spouse files their own self-assessment return and is taxed on the income to which they are beneficially entitled. HMRC’s starting point for assets in joint names is an equal split, displaced only by a Form 17 declaration supported by evidence of unequal beneficial interests; the rules are set out in HMRC’s manual on property held jointly by married couples. HMRC does not apply a US state’s community property classification to a UK-resident couple’s income.

Question	US return (separate filer, nonresident alien spouse)	UK return (HMRC)
Unit of taxation	Individual, but income first characterised under community property law	Individual; independent taxation
Salary	All to the spouse who earned it (section 879)	All to the spouse who earned it
Investment account in one spouse’s sole name	Half each if the asset is community property; title is not decisive	Taxed on the beneficial owner, normally the named holder
Investment account in joint names	Half each if community; otherwise by actual ownership	Half each unless a Form 17 declaration applies
What decides the split	Domicile, date and source of acquisition, any marital property agreement	Legal and beneficial ownership under UK law
Supporting document	Form 8958 and an explanatory statement	Form 17 where interests are unequal

The two returns therefore agree on salary and frequently disagree on everything else. That is not an error to be eliminated; it is the correct result of two systems asking different questions. What matters is that the difference is deliberate, documented and reflected in the foreign tax credit computation. A UK return prepared in isolation by one firm and a US return prepared in isolation by another is how the mismatch goes unnoticed for years. Our UK tax return preparation runs alongside the US work for precisely this reason.

How are self-prepared returns that ignored community property corrected?

The errors we see fall into four groups: wages halved with a spouse who files no US return; all of the income from a community account reported by the American with no allocation; half of the income from a spouse-titled community asset omitted; and the non-US spouse’s salary partly imported on to the American’s return. Some overstate income and some understate it, often on the same return. Correction follows a fixed sequence.

1. Establish domicile year by year. The date on which a community property domicile ended, if it did, is the hinge of the whole analysis. We document it from leases, property sales, voter registration, state tax filings and the terms of the assignment.
2. Characterise the assets. Each account is traced to the funds that built it: earnings during the marriage under a community domicile, assets owned before the marriage, or the non-US spouse’s own earnings under a separate property system. Any marital property agreement is read, because a valid agreement can change the character of property and of its income.
3. Re-allocate under section 879. Earned, business and partnership income returns to the spouse who generated it. Separate property income goes to its owner. The residual community income is divided.
4. Re-run the exclusion, credits and surtaxes. The foreign earned income exclusion, foreign tax credit baskets, net investment income tax and additional Medicare tax all change when the income figure changes, as do the Form 8938 thresholds.
5. Choose the filing route. Open years are corrected on Form 1040-X. A refund claim must generally be made within three years of filing the original return or two years of paying the tax, whichever is later. The IRS ordinarily has three years to assess additional tax, extended to six where more than 25% of gross income was omitted, which a mistaken wage split can easily produce. Where the correction exposes unreported foreign income or missing FBARs and the conduct was non-wilful, the IRS streamlined filing procedures are normally the appropriate route: three years of returns, six years of FBARs and a signed non-wilfulness certification, with no offshore penalty under the Foreign Offshore Procedures for those who meet the non-residency test.
6. File consistently from then on. Form 8958 and a standing statement are attached each year, so that the allocation is the same on every return until the facts change.

Quietly switching method on the next return without addressing earlier years is the one approach we do not prepare. An unexplained fall in reported wages or investment income from one year to the next invites exactly the enquiry it was meant to avoid.

Points that are commonly misunderstood

• “I left Texas years ago, so this cannot apply.” Leaving a state is not the same as acquiring a new domicile, and assets acquired as community property generally stay community property.
• “My spouse is British, so community property is irrelevant.” Your own domicile can make your acquisitions community property even if your spouse has never set foot in the state.
• “The software split my wages, so that must be correct.” With a nonresident alien spouse and no joint election, earned income is never split.
• “The account is in my name, so all the income is mine.” Title does not decide community character.
• “HMRC and the IRS will divide our income the same way.” They will agree on salary and often on nothing else.

Speak to us in confidence

Community property is the least examined assumption on most expatriate returns, and for a high-earning American with a non-US spouse it changes reported income, surtax exposure, foreign tax credits and asset reporting at once. Jungle Tax prepares the US and UK returns together for high-net-worth cross-border households, documents the domicile and allocation position properly, and brings earlier years into line through amended returns or the streamlined procedures where they are needed. To have your returns reviewed, contact our cross-border team for a confidential consultation, or explore our other cross-border guides.