Most married couples file a joint tax return. However, there is no legal requirement that they do so. They can always elect to file separate returns. Moreover, if one spouse refuses to sign a joint return, there will be no alternative to filing separately.
As a general rule, when a married couple files a joint return each spouse is jointly and individually liable for the entire tax owed on the return. This means that either spouse can be required to pay the tax due, plus any interest, penalties and fines.
This is not the case if you’re married and file a separate return. In this event, you’ll be liable only for your return. You’ll avoid being personally responsible for your spouse’s taxes.
So, if you think your spouse is evading taxes, it might be a good idea to file separate returns.
However, filing separately has significant tax implications. Certain deductions will be cut in half for each spouse and others lost entirely. For example, filing separately results in a 50 percent reduction on each spouse’s return of what may be your most valuable deduction: the home mortgage interest deduction.
Home mortgage interest for a loan or loans totaling up to $1 million for the purchase of a main or second home is deductible as an itemized deduction. The $1 million limit applies if you’re married and file jointly, or are single filing separately. In addition, interest on up to $100,000 in home equity debt may be deducted. Thus, joint filers can deduct interest on up to $1.1 million in home mortgage debt.
However, the tax law says that the home mortgage interest deduction must be cut in half in the case of a married person filing an individual return — in other words, a married person filing separately can deduct the interest on a maximum of $600,000. The obvious purpose of the 50 percent reduction is to prevent married homeowners who file separately from each claiming a deduction on $1.1 million of mortgage debt, for a total of $2.2 million.
If each spouse’s name is on the mortgage and they each pay half the interest, they’ll each get 50 percent of the mortgage interest deduction on their separate return. In this event, there may not be much difference in their total tax liability than if they had filed jointly.
However, if only one spouse’s name is on the mortgage, the 50 percent reduction can be brutal. Faina Bronstein found this out the hard way. In 2007, she and her father-in-law purchased a home in Brooklyn together for $1.3 million. They jointly took out a $1 million mortgage. Faina lived in the home full time with her husband, and she paid the entire $50,000 interest on the mortgage herself.
Faina and her husband filed their 2007 taxes separately. On her separate return, she claimed the full $50,000 interest deduction for the home. Her husband took no mortgage interest deduction at all on his separate return.
Faina may not have followed the exact letter of the law, but she and her husband did not try to take a double mortgage interest deduction. Faina deducted no more than she could have if she and her husband had filed jointly.
Unfortunately, the IRS and U.S. Tax Court didn’t see things Faina’s way. They ruled that the tax law had to be read literally, and the 50 percent reduction applied in her case. As a result, she was limited to deducting interest on $500,000 of her mortgage debt. Her husband got no deduction at all because his name wasn’t on the mortgage and he didn’t pay any of the interest.
Had Faina stayed unmarried, she could have deducted her $50,000 interest on the whole $1 million mortgage. The 50 percent reduction in the mortgage interest deduction applies only to married people who choose to file separately, not singles who must file that way.