The Community Land Model version 3 (CLM3) is the land component of the Community Climate System Model (CCSM). CLM3 has energy and water biases resulting from deficiencies in some of its canopy and soil parameterizations related to hydrological processes. Recent research by the community that utilizes CLM3 and the family of CCSM models has indicated several promising approaches to alleviating these biases. This paper describes the implementation of a selected set of these parameterizations and their effects on the simulated hydrological cycle. The modifications consist of surface data sets based on Moderate Resolution Imaging Spectroradiometer products, new parameterizations for canopy integration, canopy interception, frozen soil, soil water availability, and soil evaporation, a TOPMODEL‐based model for surface and subsurface runoff, a groundwater model for determining water table depth, and the introduction of a factor to simulate nitrogen limitation on plant productivity. The results from a set of offline simulations were compared with observed data for runoff, river discharge, soil moisture, and total water storage to assess the performance of the new model (referred to as CLM3.5). CLM3.5 exhibits significant improvements in its partitioning of global evapotranspiration (ET) which result in wetter soils, less plant water stress, increased transpiration and photosynthesis, and an improved annual cycle of total water storage. Phase and amplitude of the runoff annual cycle is generally improved. Dramatic improvements in vegetation biogeography result when CLM3.5 is coupled to a dynamic global vegetation model. Lower than observed soil moisture variability in the rooting zone is noted as a remaining deficiency.