If married spouses elect to file separate returns (see previous post re: filing status), each should report only their own income, exemptions, deductions, and credits on their individual return.  This reporting may be easier said than done.  It may not always be clear who owns what investment and its income stream and who paid and is eligible for which deductions.  The situation may be even more complicated if the spouses live in a community property state such as California.  The following are some very brief guidelines:
While state laws vary, community property generally includes all property acquired by either spouse during their marriage other than property received by gift or inheritance.  Federal law looks to state law to determine what property is community property.  Income from community property (including wages and self-employment income) is community property.  In some states (not including California) income earned from separate property investments is community income.  One-half of each spouse/ex-spouse’s community property income and all of their separate property income should be included on each spouse’s separate return.  Note that in some states (including California) wage and self-employment income ceases to be community income after the date of separation.

Further complicating the issue of community vs. separate property is the fact that the nature of the property can be changed by transmutation (e.g. changing the title of property from one spouses name to “Husband and Wife as Community Property” or joint tenants or vice versa).  The nature of property may also be changed by the commingling of funds or the use of community funds to maintain a separate property investment.  This is why so much effort is often spent on “tracing” funds in a divorce proceeding.  If one spouse owns a business as their sole and separate property but they don’t take a “reasonable” salary from the business, a portion of the increase in fair market value of the business can become community property (i.e. the portion that would have been community wages).

Itemized deductions – if one married spouse files a separate tax return, the other spouse (if they file with a married separate status) may not use the standard deduction and must also itemize.  Itemized deductions may be claimed to the extent the taxpayer has a right to the deduction (e.g. they must be on title to a mortgaged property to be eligible for a mortgage interest deduction) and actually paid for the deduction.  Payments made from joint or community bank accounts are generally presumed to have been made equally.  However, this presumption may be rebutted if one spouse can demonstrate that their own funds covered the expense (here is that tracing issue again).