Each year, you have the option of claiming either the standard deduction or the sum of your itemized deductions, which include mortgage interest, state and local income taxes, and donations to charities. When you're single or married filing jointly, you don't have to worry about how your deductions affect another tax return. However, special rules apply if you're married filing separately.
Both Must Itemize or Not
If you're married filing separately, both spouses must make the same selection when deciding whether to claim the standard deduction or itemize. If one spouse itemizes, the other must itemize as well. Otherwise, this would allow taxpayers to game the system by having one spouse take all of the itemized deductions and the other claim the standard deduction.
When you file separately and both spouses itemize, each dollar of deductions can appear on only one spouse's return, rather than letting both spouses deduct the same costs. For example, if you and your spouse donated $5,000 to charity during the year, the total charitable donations on both returns combined cannot exceed $5,000. The rules for dividing the deductions depend on whether you live in a community property state.
Non-Community Property States
Usually, the spouse who paid the expenses must claim the deduction when you itemize. If you paid the expense from a joint account, split the deduction between the two tax returns. For example, say you made a $5,000 donation to your church from your personal account. That deduction must go on your tax return. Alternatively, if you and your spouse pay the mortgage from a joint account each month, and the deductible interest for the year is $16,000, you each report an $8,000 deduction.
Community Property States
If you live in a community property state, all your income and deductions get split evenly between you and your spouse. That's right, even if you paid the entire mortgage and made the charitable donation, half the deductions go on your tax return and half go on your spouse's. According to Smart Money, this likely eliminates the tax savings of filing separate returns. But if you're concerned about your spouse's honesty or tax accounting, filing separately offers more protection if your spouse is found cheating.
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