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Question: Fred and Jan are married, live in a community property state and plan to file separate returns. Jan earns $30,000 in wages from her employer. Fred is self-employed, earning $50,000 in net profit from his Schedule C business. How much income will each spouse report on their separate tax returns? Will each be subject to self-employment tax on their share of the Schedule C business income?

Answer: Because they live in a community property state, each reports half of all income from both spouses. Jan reports $15,000 of her wages and $25,000 of Fred’s Schedule C business net profit, making her income $40,000. She will be liable for the federal income tax on the full $40,000. She will not be liable for self-employment tax for her half of Fred’s business income. Fred also reports $40,000 of income ($15,000 of Jan’s wages plus $25,000 of his business income). He will be liable for federal income taxes on his $40,000 of income and will be liable for self-employment tax on the full $50,000 of his business profits.

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