If you and your spouse have decided to file separate tax returns you might wonder how income and deductions will be split. Here is an explanation of dividing income deductions exemptions and credits when you file a tax return separately from your spouse.
State law is always the first thing to be considered as laws in each state may vary in accordance to what is legal. Lindemeyer CPA is knowledgeable on various state laws and can help you determine the best way to split these assets. However generally you would report only your own income deductions exemptions and credits on your individual return. A spouse is then allowed a deduction only for the items actually paid by the spouse but state law may determine who paid the item. Oftentimes the IRS and the courts provide very specific rules on how income and deductions should be split on a separate return. The rules on how to split some of these items including some of the more problematic items are listed below.
Income From Personal Service
Each spouse in this situation will report the amount of income they eared from wages salaries or other pay for services reported to the spouse on Form W-2 or Forms 1099.
Joint Bank Accounts
The rules for these vary from state to state bank to bank and even from account to account in the same bank. When joint bank accounts are split on separate returns it can raise many concerns. Each spouse should report interest to the extent of his or her share under the local law. So when a true joint account in which each spouse has a right to one-half of the deposited funds is in effect each spouse will report half of the income. If the married couple has a revocable account where each spouse has a right to withdraw any or all of the funds from the account or an accommodation account where one spouse provided all of the funds each spouse would then report interest in proportion to the amount of funds provided by the spouse.
EE Savings Bonds or U.S. Series Bonds Jointly Owned
If only one spouse purchased the savings bonds the interest income is taxed to that spouse. If both spouses contributed to the purchase price the interest is taxed to each spouse in proportion to his or her contribution.
Other Property Jointly Owed
Any property jointly owned should be reported by each spouse based on his or her share of the income gain from the property. This figure may be difficult to determine since state law determines the various forms of joint ownership and each spouse’s right to share in the income from the property is also determined under state law. As a general rule each spouse should report one-half the income gain from the property but this is not always the case. In some states income from the property held as tenants by the entirety (a form of joint tenancy available only to a husband and wife) belongs to the husband and so all of the income would be taxed to him.
An exemption may be claimed for any dependent who meets the regular dependency tests. However the exemptions must be coordinated since each spouse may not claim the same exemption.
If medical expenses are paid out of a joint checking account the funds are presumably paid equally by each spouse. This presumption may be rebutted and one spouse can deduct all of the expenses paid for medical care on a separate return if the expenses are proven to be paid only by one spouse.
Mortgage Interest and Real Estate Taxes
If property is jointly owned and both spouses are jointly and severally liable for the mortgage debt and taxes on the property each spouse is entitled to deduct the interest and taxes that he or she pays out. If a spouse chooses to claim the deduction they must prove that he or she actually paid the interest or taxes.
Only half of the loss can be deducted by a spouse on a jointly owned property on a separate return even if he or she pays all of the cost to repair the property.
There are many additional items involving income and deductions in which there really are no specific rules. Each item is examined separately taking into account the applicable state law and facts that will determine how they should be split on separate returns. Because these guidelines vary Lindemeyer CPA wants to help simplify the details and get your return filed properly. Click here to set up an initial consultation and we will walk you through the process of filing separate returns and dealing with any property that is uncertain.