Some months after the divorce is final, each spouse will be sitting down with their preparer to file their tax return for the year before. There are usually questions about claiming mortgage interest and real estate taxes that were made while married, and how to allocate estimated tax payments made in the prior year. If these were brought up while the couple was working on the disentanglement of the financial affairs, each would be clear on how they were going to allocate these marriage-related items.
When discussing the allocation of income, deductions, and other tax-related payments that occurred during the marriage, here are some general guidelines as to how they will be reported on separate returns:
- Income is reported by the person who has earned the income. Therefore, all wages and self-employment income is reported by the husband or wife who earned it, even though this income may have been used to support both husband and wife.
- Investment earnings in joint accounts are normally reported under one primary social security number, but would be divided equally on two separate returns. If the investment earnings are generated from an individually-owned account, the owner claims the income. If an account, including all the earnings, is allocated to one spouse only, wouldn’t it make sense to allocate all the investment earnings to the sole owner of the account?
- Deductions are generally claimed by the individual who paid it from their own account. However, if a deductible expense was paid from a joint account, generally the deduction is equally divided, with exceptions for mortgage interest and real estate taxes.
- Estimated tax payments will be considered to be paid in proportion to the taxpayers separate tax liability, unless agreed otherwise. It has been my experience that the IRS gives credit to the primary taxpayer (usually the husband), even when you instruct otherwise. This usually just takes some letter writing to fix.
Posted in: Tax Issues