Tax Term Paper

Ashley Benlolo

Tax Research Paper

Professor Schlangel

Facts

Howard and Bernadette separated and are in the process of a very bitter divorce. They will not even talk to each other and will file 2013 tax returns as Married Filing Separate. Howard notified Bernadette (through her lawyer) that he is taking itemized deductions in 2013. On the other hand, Bernadette has no itemized deductions and therefore wants to use the standard deduction, which is more advantageous.

Question

Can they both do as they plan and, if not, how is it reconciled?

Discussion and Conclusion

                When it comes to married filing separately, both spouses must choose the same method of recording deductions. If one spouse decides to itemize deductions, then the other spouse must do so as well, even if his or her itemized deductions are less than the standard deduction. We know this from IRC Section 63 (c) (6):  "Certain individuals, etc., not eligible for standard deduction  In the case of ... a married individual filing a separate return where either spouse itemizes deductions ... the standard deduction shall be zero."

        Miscellaneous itemized deductions are allowed only to the extent that they exceed two percent of the taxpayer’s Adjusted Gross Income. Therefore, Bernadette may have a large amount of miscellaneous itemized deductions and a low AGI, while Howard has little or no itemized deductions. Therefore, the separate returns may result in a lower tax liability. In our case where Howard and Bernadette are each choosing a different deduction, it does not matter who files first. If one spouse takes itemized deduction then the other cannot take a standard deduction, and if one does then it will just be reduced to zero^[1]. This rule stands consistent even when the spouses are both aware of what the other is filing.  

        However, allocation of itemized deductions between the spouses is generally based on which spouse actually paid the expenses. If an expense was paid with funds from a joint bank account, then each spouse should claim half of the expense, unless one can prove otherwise. In this case though, Bernadette has no itemized deductions so Howard will allocate these deductions accordingly. Since Howard and Bernadette’s filing status is married filing separately, they each must report on their income tax return only their very own income, expenses, credits, and deductions. For example, home mortgage interest and real estate taxes are very common itemized deductions. A home in the name of just one of the spouses, allows that spouse to claim the deduction for home mortgage interest and real estate taxes. This stands true for the period that they are married. If the home is jointly owned and the mortgage is paid from a joint account, like mentioned above, the deductions for mortgage interest and real estate taxes could be split equally between the spouses. Similarly, if Howard paid for a doctor's appointment out of his separate checking account, he should claim that deduction on his return.