Taxation of Family Income

Report Outline
Community Property and the Income Tax
Development of Family Tax Inequalities
Tax Equalization in Theory and Practice
Special Focus

Community Property and the Income Tax

Action to eliminate federal income-tax discrimination between residents of community property states and residents of non-community property states is virtually certain to be taken by Congress at its next regular session. A move was made at the last session to remove the discrimination by extending to married persons in other states the tax advantages now enjoyed by couples in community property states. Although efforts to amend the Republican tax-reduction bill to that end were unsuccessful, the majority leadership agreed to include an equalization provision in the general tax revision planned for 1948. A majority of Democrats in Congress support the reform, and the administration has indicated, through Secretary of the Treasury Snyder, that it considers some kind of equalization desirable.

State Property Laws and Federal Tax Inequality

Under present revenue laws, husbands and wives in community property states are permitted to file separate tax returns, each covering one-half of the total family income, even if one spouse has no separate income. Division of the family income in this way may be highly advantageous for the taxpayers because, under the graduated rate schedules of the federal income tax, the levy on a single income of a given amount may be considerably larger than the sum of the taxes on two incomes aggregating the same amount. The tax advantage thus accruing to residents of community property states is particularly marked because in most families the husband earns the entire family income.

Efforts by married couples in non-community property states to divide the husband's income by means of assignments, trusts, or family partnership arrangements have, with few exceptions, been disallowed as attempts at tax evasion. But in the community property states ownership of family income is vested equally in husband and wife by state law, and the federal courts have ruled that the Treasury must recognize the division for tax purposes.