I am in a similar situation to PeeQueue in this thread. My situation is slightly different in that I’d like to be able to deduct the interest from my mortgage payments from my fiancee’s income even though I have paid them myself. The reason is that we might be able to get her into a lower tax bracket. We have separate accounts and nearly all of the mortgage payments have come from my account. However, both of our names are on the mortgage. Is it legal for us to deduct the interest from her income when it is evident that I paid it? Will attempting something like this flag us/me/her for an audit? The thread I linked to implies that we can split up the deductions based on how much we individually paid, but not that we have to. Do we?
Reprinting the IRS rule about this situation, which was in the other thread (from IRS Publication 936):
I am not a tax attorney. However, the above does state that you must “show how much interest each of you paid,” which implies that you can’t just arbitrarily divvy up the tax advanatage. Although, realistically, in a joint household like yours a lot of the bills are sorta paid from a joint pot, seems like it would be hard to argue that your fiancee paid all the interest when the payment came from your bank account.
Just to be clear, your fiancee makes enough more than you to be in a higher tax bracket than you, right? If you split the mortgage interest deduction 50/50 (or in proportion to your income), will she drop into your tax bracket anyway? For reference, tax bracket cutoffs for single people (after subtracting allowances) are at $4275, $15050, $32960, $72600, and $156875.
I hope this half-assed answer helps.
A much easier solution would be to just elope before the end of the year, and file as married.
Oh, by the way, something I just thought of: remember that taxes, including real estate taxes (that you might be paying through an escrow account) are deductable on Schedule A. This gives you a little more deductable expenses associated with your house that you can split up. You probably knew that, though.
FWIW, you gain no real advantage in just getting into a lower tax bracket. Since the tax system is graduated, this means that simply moving from the 27% to the 32% bracket does not increase your entire tax burden to 32% – only the income above the cutoff for the 27% bracket. In reality, you want the highest bracket possible, since this means you’re making more money.
So, given that, thinking of the best way to apply the mortgage interest deductions could still be advantageous – you could do a complete return given the deduction to both tax payers – subject to law – and see which one results in the least combined tax. If it merely brings her down to the same bracket as you, it’s a break-even proposition whether or not you or she does it. If it brings her to a lower bracket than you, it’s to your (all) advantage.
For the record, we are currently in the same tax bracket. There are not enough deductions to bring me down one, but there may be enought to bring her down one.
Right – hard to argue or illegal to argue? What are the chances I will be in a position to have to argue? I don’t mean to condone cheating, so if it’s just plain against the rules, how much leeway do I have?
Thank you for reminding me about the graduated brackets. :smack: However, the above two quotes seem contradictory to me. Is there an advantage to distributing the deductions in this (or any specific) way?
Yes! If you and your fiancee are 1) in the same tax bracket (you say you are), and 2) both have enough deductions, individually, to itemize anyway (over $4700 for singles) then you want to split the interest deduction between you, so that you both stay in the same tax bracket. Doesn’t matter what distribution accomplishes this. Why? Because you want to apply the deduction to the highest tax rate you can. Since the brackets are graduated, dropping your fiancee into a lower bracket saves you less money.
If you and your fiancee are 1) in the same tax bracket, and 2) do not have enough deductions to itemize anyway, then you’re probably better off having one of you take the standard deduction and the other one itemize, taking as much of the mortgage interest, etc, as you reasonably can (maybe all). This gives you the maximum amount of money deducted (one standard + one itemized). You still want to stay in the same bracket, if possible; as a rule of thumb, the one making the largest salary ought to take the itemized deduction. I infer that in this case, this is you as opposed to your fiancee.
Let me repeat: I’m not a tax attorney or professional. As to your original question, I don’t really know the answer; you see my speculation above. However, I suggest that you might be better off, tax-wise, if you take most (all) of the mortgage interest deduction, not your fiancee. And, since the money comes out of your checking account, not your fiancee’s, seems like there’s a better argument for calculating deductions on that basis.
If you are about to be married and you both make about the same amount of money you should be made aware of the so-called marriage penalty. Namely, you will pay more taxes after you are married then before when you filed separately. This is especially true if you both make a lot of money. If you were planning to be married before the end of the year you should consider delaying until the next year to at least get one more year at the lower tax rate. Do some rough figuring with tax forms both ways and you may see several thousand dollars difference.
Counterwise, if you and your spouse make very different salaries (or one does not work) you can pay less tax than when single.