Category: Uncategorized

Disclaimer: I’m not an attorney or accountant/CPA, and this is not legal or tax advice. Check anything I say here with your own attorney or tax advisor.

There are currently nine community property states, and a few others*** that allow the creation of community property. In Washington state, where I live, married couples’ property earned during their marriage is generally considered community property, such as income, property purchased, etc. Any property earned PRIOR to the marriage is considered separate property, unless the couple intentionally commingles it. Any gifts or inheritances received by one spouse during the marriage are also considered separate property.

IRS’s step-up basis rule defaults for differently-titled accounts in community property states

Individual accounts

When one spouse dies, any taxable assets held in that spouse’s individual taxable account should receive full step basis at death, meaning the surviving spouse can sell or gift those assets tax-free at the time of the deceased spouse’s death.

JTWROS

Any assets held in a Joint Tenants With Right of Survivorship (JTWROS) account could potentially only receive step-up basis on HALF the account’s value per default IRS treatment, but that half will transfer immediately to the other spouse without going through probate. JTWROS is usually the ‘default’ joint brokerage type at major brokerages. (For homes purchased while married, community property is the assumed ownership type for real estate in Washington state.)

I believe you can make the case to the IRS that the entire balance should be treated as community property, but that this might not work out and would be a hassle vs using a JCP. California may NOT respect this treatment at all with JTWROS, so either way, a JCP seems ‘safer’.

Joint Community Property (JCP) and CPWROS

If instead a couple chooses to move their assets into a joint community property account, the account MUST go through probate (no beneficiaries are allowed to be assigned), BUT it will receive double-step up basis at death, meaning the entire account balance will be stepped up when only one spouse passes away. Even better is a Community Property With Right of Survivorship (CPWROS) account, which allows double-step up basis AND avoid probate for the surviving spouse. This can be a huge tax advantage to the surviving spouse if there are highly-appreciated securities in that account. The con side is that the account must go through probate, but in Washington state, that is usually not a big deal, assuming that both spouses have their wills up to date. (Californians should do their own homework on the value of avoiding probate, as I understand it is much more onerous.)

Should married couples move their taxable assets into community property accounts?

The tradeoff is (1) potential tax-savings for the surviving spouse or other heirs that the surviving spouse might want to gift to vs (2) probate and (3) the loss of separate property treatment in the event of a divorce.

If one spouse had a significant inheritance from their parents that they’ve kept separately in their own individual account, a judge would likely award all of that to them in the event of a divorce, since it would be clearly their own separate property. If that spouse chooses to transfer any of that inheritance to a community property account, it is now owned 50-50 by both parties, and loses it’s separateness.

So, if you are not worried about divorce, you ARE worried about avoiding capital gains taxes, and you’re ok with the assets going through probate, moving money to a joint community property brokerage can be a wise move.

Recommendation

For older couples in solid relationships who are unlikely to ever divorce and who are comfortable navigating probate in their state (ex: Washingtonians), I would recommend they move their individual or JTWROS equity assets to a joint community property account to prepare for one of them passing away to avoid future capital gains taxes.

For younger couples in good health or with low capital gains with unequal amounts of separate property, it might be a good idea to wait on commingling everything into a community property brokerage in case they ever decide to separate, as roughly 50% of all marriages do.

Point of clarification

Retirement accounts like 401ks, IRAs, or other individual-only accounts like HSAs, are NOT eligible to be community property. Generally, taxable brokerage accounts, bank accounts, and real estate are things to consider making community property.]

Appendix

*** Wikipedia as of 2026-08-04: “Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin [are community property states.]

Four other states have adopted optional community property systems. Alaska allows spouses to create community property by entering into a community property agreement or by creating a community property trust.[2] In 2010, Tennessee adopted a law similar to Alaska’s and allows residents and non-residents to opt into community property through a community property trust.[3] More recently, Kentucky adopted an optional community property system in 2020, allowing residents and non-residents to establish community property trusts.[4] Finally, Florida adopted a similar law in 2021, allowing citizens and noncitizens to establish community property trusts.”

If you give up your green card or US citizenship, you must pay an ‘exit tax’ to do so.

Read the source of this article for really great in-depth info on the subject: https://www.greenbacktaxservices.com/knowledge-center/exit-taxes-us

[The exit tax involves] taxing the unrealized gains on [the person giving up their US personhood’s] worldwide assets as if they were sold for fair market value the day before they left.

Essentially, the IRS acts as if you sold all your property (houses, stocks, businesses) the day before you renounce citizenship, even if you didn’t actually sell anything. You are then taxed on the profit that those assets have built up over time.

[..] The U.S. State Department has reduced the renunciation fee to $450, effective April 13, 2026.

Per the article above, if you have less than $2 M in net assets (after subtracting debts), have remained 100% compliant on your US tax filing, AND have averaged less then ~$200,000 in actual annual tax payments (NOT income!) to the US for the past 5 years, you are NOT a ‘Covered Expatriate’, and do not have to pay any exit tax.

For most people working in a country with a US tax treaty who have continued to file in the US, they therefore would only get hit with the US exit tax if their net worth is over $2,000,000 when they renounce their citizenship/green card.

For Green Card holders, “[y]ou are only subject to these tests if you are considered a Long-Term Resident. This means you held your Green Card for at least part of 8 out of the last 15 tax years. If you leave in year seven, you can often avoid the exit tax entirely, regardless of your wealth.”

Exit Tax Exclusion amount

Even if you DO qualify for the Exit Tax, the IRS lets you exclude gains of $910,000 (for 2026), so you still might not pay anything, depending on your unrealized gains when you renounce.

Specified Tax-Deferred Accounts (IRAs and HSAs)

“If you are a “covered expatriate,” certain accounts are treated as if they were fully cashed out the day before you left. This is called deemed distribution.

• Which accounts are affected?
  • Traditional IRAs, Roth IRAs, Health Savings Accounts (HSAs), and 529 College Savings Plans.
• The Tax Hit: You must report the entire balance of these accounts as ordinary income on your final U.S. tax return.
• The Downside: You cannot apply the $910,000 exclusion to these accounts. They are taxed from the very first dollar.
• The Silver Lining: The IRS generally waives the 10% early withdrawal penalty for these deemed distributions, even if you are under age 59½.”

Intro to options

Strike aka Exercise Price

The price at which you have the option– but not the obligation– to buy the stock at. If this price is BELOW the current fair market price at which you could sell the stock for, your options are ‘in the money’. If the current value is BELOW your strike price, you are ‘out of the money’, and the only value in your stock options is the ‘time value’, the chance that the future price will be higher than your exercise price. If the market value never exceeds your strike price, your options will ‘expire’ worthlessly at the expiration date, which is typically around the time your terminate with your employer OR 10 years from when the options were granted to you (NOT from the later date when the vested.) Companies that have not IPO’d or otherwise sold themselves will often adjust the expiration dates so that long-time employees don’t get screwed out of their options at the 10 year mark.

Calculating the value of stock options

The value (market price) of options have two components: the money value, and the time value. Added together, these = what someone would pay for your options.

Money value

The difference between the current stock price and your strike (exercise) price.

Time value

An option has time value because you can’t lose money when the underlying asset dips below the strike price AND the fact that the underlying asset can still increase in value before your option expires. To compute the time value, use this calculator: https://www.cboe.com/education/tools/options-calculator/

Employee Stock Options: ISOs and NSOs

Incentive Stock Options (ISOs) provide favorable tax treatment if you follow some of the rules. If you hold the resultant shares for 2 years after the option grant date AND 1 year after you exercise the options, then you pay long-term capital gains taxes on the different between the market value at sale (sale price) and the original strike price. If you fail to do this, you must pay regular income taxes on the difference between the purchase price of the stock (the fair market value at exercise) and the exercise price.

NSOs can often be held longer past an employee’s termination date with a company, but have less favorable tax treatment. The tax is essentially the same as a “disqualifying disposition” for ISOs.

Employee stock option taxes

Summary: https://carta.com/learn/equity/stock-options/taxes/ with excerpts below:

Comparison of tax treatment of ISOs by holding periods: https://dqydj.com/iso-calculator/