Tax Issues in Divorce: Real Estate Itemization Credits
With the April 15th tax filing deadline quickly approaching, I am beginning to see an increase of the tax-related issues arise in my client’s cases. The right of either of the parties to claim itemized deductions associated with the real estate taxes and mortgage interest paid on the marital residence is a frequent issue of contention.
It is important to first understand that if you were divorced in the early part of 2015 and filing under a “married, filed jointly” designation for the 2014 tax year, by default, you are sharing in the itemized deduction with your spouse due to the joint filing. From a practicality standpoint, many divorced couples that file their last joint tax return together reach an agreement to equally split any tax refund or liability associated with their joint filing.
With a “married, filing separately” or “individual” tax filing designation, it is important to come to an agreement with your spouse or ex-spouse regarding the itemized deductions associated with the marital residence. As the combined deduction between yourself and your spouse cannot exceed the actual interests or taxes paid in a tax year, getting ahead of the issue and reaching an agreement prior to either party’s tax filing is extremely important.
For successfully navigating this issue, I recommend that you consider the following three points:
How much did either party pay towards the mortgage interest and real estate taxes?
With the overwhelming number of divorce matters settling by private agreement, it is important to take into consideration the financial obligations under the controlling agreement. For example, if a party is behind on child support support or failed to make timely mortgage payments, they should not receive the tax benefit of claiming 50% of the mortgage interest or real estate tax deductions.
It is also common for the parties to pay a disproportionate amount towards the monthly mortgage/tax obligation due to either a greater income level or private agreement. In these scenarios, I often find it useful for the parties to split the itemized deduction in direct proportion to the amount paid.
Balancing out the real estate tax deductions with other tax-related benefits.
Many parties often overlook the benefit of trading off real estate tax deductions with other tax-related benefits such as claiming the children as dependants, charity deductions or medical expenses. If the goal is to equalize tax credits to both parties in a divorce litigation, applying other deductions or credits to one party may assist the parties in achieving their tax credit equalization plan.
Maximize your tax benefit by speaking with a qualified tax professional.
The goal of applying any itemized deduction is to reduce your adjusted gross income (AGI) by as much as possible. As there may be scenarios in which it is beneficial from a tax standpoint for one spouse to claim the majority of the mortgage interest deduction, it is very important that you engage a qualified tax professional to maximize the tax benefit to both parties in the divorce process. Similar to my previous point, if one spouse benefits from taking a disproportionate amount of the real estate itemizations, there are other available remedies to ensure that the other party receives similar tax benefits, such as, claiming children as dependants and/or a uneven distribution of the charity donations.etc.