Consider Allocation Of Mortgage Interest Tax Deduction When Filing A Divorce Decree
In Ohio, and elsewhere, you may be able to deduct the interest paid on the mortgage on your principle residence when filing your tax return. A deduction is simply the lowering of your taxable income. For example, if you make an adjusted gross income of 70,000 dollars and have paid 10,000 dollars in mortgage interest throughout the year, you’re taxable income before other deductions would be 60,000 dollars.
Regardless of whether you’re single or married, you’re able to claim your mortgage interest deduction on your itemized return. When you file your return, you’re also required to list your filing marital status. The IRS requires that you claim your marital status in accordance with your marital status on the “last day of the year.” So you must have been married on December 31st of the year to file as “married” for that year.
There are two types of deduction schedules you’re able to file, an itemized or a standard deduction. It only makes sense to file an itemized deduction only if your deductions exceed your standard allowance, which in 2013 reached $6,100 for an individual filing as a single and $8,900 for those filing as head of household. If you’re divorced and have an agreement in the final divorce decree regarding the interest allocation, you’re able to split the deduction between your returns as indicated as long as you meet the IRS rules.
In order to do this, you’ll first receive your mortgage statement for the year. This mortgage statement will outline your payment in four parts. The first part will be the principal payments, or the amounts paid on the original debt. Next, you’ll find the interest payments, which is essentially a payment in order to borrow the initial money. You’ll also pay real estate taxes and possibly insurance on your mortgage. After you have amassed this mortgage information, you’ll then include the information on your 1098. The 1098 form is the “Mortgage Interest Statement” and is fairly short and straight forward. Once this is filed, your taxable income will be reduced by the amount of interest paid on your mortgage.
While you’re married, this deduction is not an issue, as it’s typically deducted from your joint income regardless of whose name is on the mortgage. But if a divorce occurs, things can get complicated and leave one party with no deduction at all. The final divorce decree typically will address the allocation of this tax deduction. The lesson here is to make sure you address the situation in your divorce decree, leaving any future debates over the right to claim it moot. If one person receives full ownership of the house, they will then receive the deduction. If after the divorce the ownership of the house remains jointly owned, then complications can arise.
There are a few specific post-divorce scenarios concerning interest that warrant attention:
Say, for example, if you have more than one borrower on a mortgage and you’re paying interest jointly, but only you maintain a statement, make sure you itemize how much you, and only you have paid. Similar to alimony, you must inform the other borrower of how much they’ve paid, and claim accordingly.
Claiming Interest On Your Mortgage And Alimony Interest Payments
If the house is jointly owned after the divorce, there are other filing situations that can occur. For example, if you still own the house and your ex-spouse lives at the house, you’re able to claim half the interest paid on the mortgage, and then the other half you’re able to claim as alimony payments, which have been discussed in other blog articles. Similar confusing situations can occur if the divorce decree changes ownership of the home. If you maintain ownership in the home, even if you do not live in it, you’re able to claim all of the interest on your return. But if this occurs, you can’t claim any of the interest payment as alimony. If your ex-spouse owns the home and lives in it, but you take responsibility for the house payments, then you generally can deduct that money as alimony; your ex-spouse would have to report the alimony as income, but could also claim the mortgage interest deduction as the owner.
Avoid An Audit And Work Closely With Your Divorce Attorney Regarding Mortgage Interest Tax Deduction
As you can see there are several complications that can arise when dividing up the house in a divorce action. These “technicalities” can certainly affect your tax liability. The best way to assure the anticipated outcome for both you and your soon to be ex-spouse would be to work closely with your divorce attorneys and come to an agreed upon resolution. Click here to go to the IRS website to learn more about these mortgage and interest deduction issues. Be careful to follow these rules carefully and consult a tax professional with any questions. Do your best to avoid inconsistencies in your respective tax returns to avoid a potential audit!
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Robert L. Mues
Robert Mues is the managing partner of Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has received the highest rating from the Martindale-Hubbell Peer Review for Ethical Standards and Legal Ability. Mr. Mues is also a founding member of the "International Academy of Attorneys for Divorce over 50" blog.