Source: ezinearticles.com
With a little bit of planning some gay and lesbian couples can take advantage of their unmarried status and save more money with two separate tax returns than a married couple saves with one. In my last column I explored ways in which a few couples can make the medical deductions work for them. Today I will address common questions that same sex couples have about allocating the biggest prize of the itemized deductions - mortgage interest. There are many considerations and complications that legally married "joint return" filers do not have to face.
How do we decide who takes the mortgage interest deduction?
You should plan to file your two returns in whatever way benefits the two of you the most as a unit. For instance, if there is a large disparity in income the partnership generally benefits the most if the higher income/higher tax bracket taxpayer takes the deduction.
O.K. But we have only one checking account, which is joint. The IRS would not expect us to "split" the deduction?
No. Would the bank only go after 1/2 of the house if you were in default? You are essentially one "unit" to the bank; it's just for tax purposes you are two. There are no clear written IRS rules on how to allocate the deduction in this case, so common sense and accepted practice take precedence. As long as the evidence supports your deduction- you made the payments together on a joint liability and have no individual checking accounts - you should be able to allocate the mortgage interest deduction in any matter that you choose.
That's a lot of ifs. We each have individual checking accounts as well. We do pay the mortgage interest out of the joint checking account, but it is funded by our contributions from the individual accounts.
In this case you need a little more planning. The IRS might take the position (in the case of an audit or examination) that the deduction should be split in the same ratio as the contributions from the individual accounts. To avoid this problem, consider having the partner taking the deduction pay the interest out of his or her personal account, and have the other partner "offset" it with payments for other expenses. The details of the arrangement -whether you want an equal offset, whether you want the agreement in writing, etc. are of course up to you.
We have a joint checking account - our paychecks are deposited there and all our routine expenses are paid out of it. In addition I have an investment account that I write checks out of occasionally, but it is not used to fund the joint account? Problem?
I don't see why that would be a problem, unless you started transferring funds from your account into the joint account.
We have arranged that I will take the deduction on my tax return. But the "1098" form the lending institution issued at the end of the year was in the name of my partner not me. Can I still take the deduction?
Yes. Your name is still on the loan, although it is not on the tax form. You should list your mortgage interest on line 11 of Schedule A, "mortgage interest not reported on 1098" with your partner's name and social security number on it. But if you are going to be the person taking the full deduction for the near future I recommend you contact your lender and ask them to make your social security number the primary one for reporting purposes. The IRS keys on the social security number on the 1098. In the case of an examination you would ultimately prevail because your name is also on the loan, but you do not want to give the IRS a reason to investigate your full return, do you?
Must we be consistent in determining who takes the deduction? Can we alternate?
While some tax preparers advise against alternating, to my knowledge there is nothing in the tax code or tax case law that prevents it. Just remember to pay out of the appropriate account and make sure to have your lender change the 1098 forms accordingly. This means planning before the year begins, income tax bracket, .
Her income is higher but not by much. How should we allocate the deduction?
In this case it's not as straightforward. You may want to actually split the deduction, but it really depends on your entire tax situation. Again, try to plan.
My name is not on the deed but both our names are on the mortgage. I pay the entire mortgage. Can I legitimately take the deduction?
You certainly can, and should. You and your partner can each be held liable for the entire mortgage. And since you made the payments yourself, the deduction is yours alone. The bank (apparently) doesn't care that your name is not on the deed - if the joint loan goes into default they can still go after the underlying asset.
Now, whether this is a fair partnership situation is another question. In the case of dissolution of the relationship the "deedless" party may be at a disadvantage - liable on the loan but the other partner holds the "cards" (the house).
Phew! Do they have these problems in Canada? Legally recognized marriage simplifies tax matters. Maybe when the practice heads south CPA's will become obsolete.
Note: Everyone's tax situation is a little bit different. Contact your tax adviser about your specific situation.
Richard Streitfeld is a CPA practicing in Cranston.
