Author Topic: engaged couple - who should claim home interest deduction?  (Read 475 times)

coffeefueled

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engaged couple - who should claim home interest deduction?
« on: September 07, 2018, 08:07:47 AM »
My fiance and I bought a home this year, but we're not getting married until next summer so we'll fill separately in 2019. We've always had simple taxes and filled them ourselves, but we're not sure who should claim the home interest and property taxes to give us the best combined outcome on our taxes.

We both max out our 401ks. We don't have student loans or anything else that changes our deductibles etc besides a little in charity contributions. We both previously owned separate condos which we sold this spring to buy our new home (~$650k @ 4.5% with 20% down in Virginia).

Salary: me ~$95k; him ~$110k

Anyone know that math on how to figure out the best option on who should claim the interest and property tax or whether we can/should split it?

reeshau

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Re: engaged couple - who should claim home interest deduction?
« Reply #1 on: September 07, 2018, 08:22:20 AM »
Magic of the internet:

https://budgeting.thenest.com/tax-deductions-related-jointly-owned-property-unmarried-individuals-23898.html

Given that you do your own taxes, you can take the advice in the article:  Try it both ways, and see what comes out.  This will be trivial, assuming you use some kind of tax software to file.  But the real point of the article is that it doesn't matter, unless one of you (at least) has enough deductions to itemize, with the standard deduction increasing this year.  When did you buy your new house?  A full year of that size mortgage should do it, for a single filer.

coffeefueled

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Re: engaged couple - who should claim home interest deduction?
« Reply #2 on: September 07, 2018, 09:15:39 AM »
Thanks @reeshau. I figured we would probably end up playing around with Turbotax a couple times to see which way would come out ahead, but wanted to check with the general forums wisdom to make sure I wasn't missing something. We closed on the house in June so I'm not sure we'll make it over the new standard deduction.

NathanP

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Re: engaged couple - who should claim home interest deduction?
« Reply #3 on: September 07, 2018, 09:30:01 AM »
Based on your numbers, the interest paid in 2018 should exceed the single's standard deduction of $12k (don't forget to add any interest paid on the condo in 2018).

I suspect that both of you will have ample income taxed in the 22% bracket, so the deduction's value should be equal. Perhaps one of you has student loans or makes charitable contributions? That person likely will benefit the most as those deductions would be added to the home interest to reduce the tax burden further.
« Last Edit: September 07, 2018, 09:32:14 AM by NathanP »

seattlecyclone

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Re: engaged couple - who should claim home interest deduction?
« Reply #4 on: September 10, 2018, 11:35:39 AM »
The relevant IRS publication doesn't seem to give you a lot of leeway on how to report this. You're supposed to divide it up based on how much interest each of you actually paid:

Quote
More than one borrower.

If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Show how much of the interest each of you paid, and give the name and address of the person who received the form. Deduct your share of the interest on Schedule A (Form 1040), line 11, and print "See attached" next to the line.

Similarly, if you're the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Let each of the other borrowers know what his or her share is.

It doesn't say you can divide the deduction between the two of you in whatever way makes for the lowest tax bill. The instructions are pretty clear that each of you may only claim the amount that you actually paid. If you split your mortgage payments 50/50, that's how you should assign the deduction.

Of course, if you find that there would be some benefit to having an uneven split on the deduction, there's nothing stopping the two of you from agreeing (for example) that one of you will make the full mortgage payment each month, while the other will buy groceries and pay for utilities and gasoline and whatever else is needed to make overall expenses even.
« Last Edit: September 10, 2018, 11:38:32 AM by seattlecyclone »

MustacheAndaHalf

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Re: engaged couple - who should claim home interest deduction?
« Reply #5 on: September 10, 2018, 12:17:11 PM »
Years ago I was one of the lucky ones to get a "survey audit", where they audit everything just to see what taxpayers are doing.  It's not an indication of blame, but it covers everything.

At that audit, I was asked specifically the method I used to calculate mortgage interest divided between myself and someone else.  I was a bit worried I'd done this wrong, and showed the auditor my spreadsheet for calculating the exact percentage interest based on overall contributions to the mortgage.  That satisfied the agent, although I doubt an arbitrary method would have done so.  To my mind, two people on a mortgage with only one person paying the mortgage sounds arbitrary.

I think seattlecyclone's interpretation of IRS publication 936 matches my experience more than that article.

Regarding the advice to try this 3 different ways, I can't find the bio of that author.  Several websites do nothing but mention the author's name, with no links with more detailed information.  It looks like an anonymous person giving advice, with no indication of their expertise (much like me, actually!).

But having personally been audited and having this exact issue come up, it's my impression you will need to show the IRS how you arrived at the split of mortgage interest.

coffeefueled

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Re: engaged couple - who should claim home interest deduction?
« Reply #6 on: September 10, 2018, 12:34:34 PM »
That makes a lot more sense as it seemed weird that we'd be able to pick what worked in our favor. It shouldn't be too complicated to figure out the percent of the total interest that we each paid based on how we divide the monthly mortgage payment. Makes me look forward to combined finances and filing in 2020.

Nate79

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Re: engaged couple - who should claim home interest deduction?
« Reply #7 on: September 10, 2018, 11:01:00 PM »
You should have one person pay the mortgage (and the other pay all other bills) so that at least one person would have enough to itemize.

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