What must Kathy do regarding income tax in relation to her earnings and Joe's income?

The correct answer is that Kathy must pay income tax on all of her earnings. This reflects the tax obligations individuals have in relation to their personal income, regardless of whether they are married or single. In California, as well as under federal tax law, income is taxed based on the individual’s earnings. This means that each person is responsible for their earnings, and there are no provisions to exclude personal income based solely on another individual's earnings.

This choice emphasizes the principle that the tax burden corresponds directly to the income that one earns. Earnings generated by an individual must be reported and taxed accordingly, highlighting that all income needs to be included on an individual's tax return to ensure tax compliance.

The other options do not accurately reflect the tax obligations within a community property framework or individual tax responsibility. For instance, the exclusion of Joe's income would not apply, as all earned income contributes to the tax liabilities of each party. Moreover, the option regarding paying taxes on one-half of Joe's earnings simplifies the complexities involved in community income, which typically considers the income generated during the marriage, but does not directly assert an individual's responsibility for another's earnings. Therefore, Kathy’s income tax responsibility stands independently for her earnings without the need for any exclusions or sharing assumptions.