MFS and Sch A Mort Int, RE Tax

[travis bickle]

Good day,

I would like to hear from some individual(s) who have experience in the following type situation -

I have a married couple both of whom make a good salary (each is in excess of $75,000); he is active duty military and she works for a defense contractor. This year she is able to exclude approximately $59,000 under the Foreign Earned Income Exclusion Credit.

I have run their return several ways and they actually make out better by approximately $2,700 if they both file MFS instead of MFJ.

My questions follow -
1/ TTB says that I can split the Mort Int between the two parties and simply file a statement to each return saying who paid what. Has anyone done this? What results did you have? Did you file the statement electronically or mail it in?

2/ Texas is a community property state. Is that a problem in this situation?

3/ Or, is will it be better to allocate all the Mort Int to the one's who SSN appears on the 1098? And then give the other all the RE tax? And so on, down the line.

These people are a fine couple, they just had the misfortune of some poor tax planning advice.

Thanks in advance.

[Burke]

I have done these, but never attached any kind of statement to the return. I do believe you can use one of three acceptable methods: 50/50 if expenses are paid out of a joint account; a pro-rated ratio of expenses to individual incomes. (i.e, $100,000 total, he has $60K, she has $40K, then you split 60/40) without detailing who exactly paid what; or the he paid/she paid method if it can be determined. I do not believe you can arbitrarily give one the interest and the other the real estate taxes, unless you can show that is how they paid them individually. Each must claim their own state income taxes withheld.

[Gene V]

Just thinking out loud

MFS-Community property state
If you split the income 50/50 then I would think you can split the mortgage interest and property tax 50/50— even if only one paid the bills.

Reasoning: Say husband makes $60,000 and spouse makes $10,000, when you file MFS, each taxpayer reports income of $35,000 even if one spouse only made $10,000, she still has to report $35,000 as income, so why can’t she deduct half of the mortgage even if she didn’t pay it.

[jimenright]

If they are residents of a

community property state they must use community property rules to divide up income and expenses (see pub 555). I would file them as MFJ.

[travis bickle]

Thanks

for the replies.

[travis bickle]

This is going to be fun . . .

I have had to re-think and re-work this return. They will be coming in to finalize on Wed evening.

Here is the situation -

He = active duty military, home of record = Montana [therefore domiciled in Montana];
Income = active duty military W2 and a few dollars of interest

She = retired military, domiciled in Texas [I believe..have to check this];
income = W2 pay, military pension.

BUT

According to IRS Pub 555 I have one person domiciled in a noncommunity property state and one domiciled in a community property state. So I am to apply the laws of both type states to this situation.

Here are my thoughts -

1/ His military pay is separate income because he is domiciled in Montana (and Montana allows for 100% exclusion of his military pay from state tax inclusion);

2/ Her military retirement is separate income because she started receiving it prior to her marrying him, ergo he made no contribution to her being able to obtain this income;

3/ her W2 pay is separate income because she is applying the Foreign Earned Income Exclusion Credit to it and BY LAW, government employees cannot claim that credit. Since he cannot take this credit it follows that only she can and that therefore that income should be considered separate income;

4/ they did combine their funds into one bank account used by both so payments for Mortgage Interest, RE Tax, Charitable contributions, etc should be split 50-50 since there is no way to determine whose funds paid what.

Please point out any flaws in the above. I am sure there are several.
Thanks in advance