About a year ago, we devoted a post to the impact of marriage on taxes.
In that post, we asked whether there really is a "marriage penalty," by which married couples may end up paying more in federal income tax than they would have if they had filed separately. We noted that the answer depends on several factors, particularly the couple's income.
In this two-part post, we will look at two other aspects of how marital status affects taxes. Part one will look at the mortgage deductions for non-married partners. Part two will discuss the tax effects of separation or divorce.
So do married couples get any tax benefits from mortgage interest deductions, compared to unmarried taxpayers?
The answer is no. In fact, the way the law has developed in this area, unmarried couples are in a position to claim twice as in deductions as married couples. The IRS recently announced a rule change to make this official IRS policy.
How could this be? It isn't because the IRS is somehow trying to undermine incentives to get married. What happened is that the outcome of a court case out of California forced the IRS to change its position.
That case was called Bruce Voss and Charles Sophy v. IRS. In the case, both members of a wealthy unmarried couple sought to take the maximum deduction for mortgage interest available under federal law for a residence.
This maximum amount is $1.1 million, consisting of two components. The largest is mortgage debt ($1 million); the other is home-equity financing ($100,000). Voss and Sophy each tried to deduct $1.1 million, but the IRS audited the two men's returns, taking the position that they had to share the deduction.
A married couple filing jointly would be required to do that. And a married person filing separately would be limited to half of the deduction.
The Ninth U.S. Circuit Court of Appeals held, however, that each member of an unmarried couple could claim the full deduction.
It's taken nearly a year, but the IRS has now announced that it accepts the Ninth Circuit's ruling and is implementing a nationwide rule accordingly.