Married couples who file separate federal tax returns need to identify community income
and community deductions
so they will know how much each spouse should report on a separately filed tax return.
Generally, most deductions will be split evenly, with each spouse reporting half of the total deductions. Some deductions, however, must be allocated separately. And still other deductions may have a mixed allocation.
General Rule for Splitting Tax Deductions for Spouses Filing Separately
In the community property states
, a distinction is made between property that is considered legally owned by both spouses as part of their marital community (community property) and property that is considered legally owned only by one spouse (separate property). Tax deductions are classified depending on whether the underlying property is community property or separate property or whether the income generated is community income or separate income.
For example, a deduction pertaining to investment expenses would be a community deduction if the investment is community property. If the investment is one spouse's separate property, then the deduction for investment expenses would be a separate deduction for the spouse who earned the income. If an investment is a mix of community and separate property, the deduction will be allocated in the same proportion.
Allocating Personal Exemptions
Each spouse takes his or her own personal exemption. If the couple has dependents, then the couple can decide who takes the personal exemptions for the dependents. A personal exemption cannot be split. So if the couple has three dependents, one spouse can take all three dependents, or two, or one, or none.
Standard Deduction versus Itemized Deductions
Married couples filing separately must both itemize or both take the standard deduction. Generally it's advisable to take whichever deduction is beneficial across both separate returns.
Deduction for Traditional IRAs
Individual retirement accounts (IRA) are considered separate property under federal tax laws. Each spouse will determine his or her eligibility for a traditional IRA deduction based on earned income calculated without regard to the community property rules. The same goes for determining eligibility for a Roth IRA.
Mortgage Interest and Property Tax Deductions
Tax deductions relating to real estate will be allocated based on whether the property is community property or separate property. If a home is owned as community property, the deduction for mortgage interest and property taxes will be evenly split between the two spouses. If a home is owned as separate property, the spouse who is the owner of the property will take the deductions.
Personal Deductions Not Related to Property
Personal expenses for medical expenses, charity, moving, and college tuition would be deductible for the spouse who actually pays for the expense, provided that the expenses are paid out of that spouse's separately maintained funds. If the expense is paid out of community funds (such as a jointly owned bank account), then the spouses will evenly divide the deduction between themselves.
If one spouse is paying alimony or separate maintenance to another spouse prior to their divorce being finalized, then the alimony is deductible for the spouse making the payment to the extent the payments exceed 50% of the spouse's imputed community income. The reason for this is that each spouse is considered to already own half of the community income, so transfers of those amounts are non-taxable. Amounts in excess of the community income allocations are separate income to the receiving spouse and a separate deduction for the paying spouse.