Deduction Belongs To Spouse Making Payments

I started divorce proceedings with my wife in April of 1993 after 23 years of marriage. We have three children, ages 23, 21 and 18.

Charles Blair, DDS and

John McGill, MBA, CPA, JD

Question:

I started divorce proceedings with my wife in April of 1993 after 23 years of marriage. We have three children, ages 23, 21 and 18.

I continued to live in our house until September of 1993 and then moved into my own apartment. When the divorce activity began, I stopped using our joint checking account and opened up my own checking and savings accounts. My wife also had her own accounts. I withdrew most (95 percent) of the money that we had in a joint savings account and put it into a savings account in my name, as advised by my legal counsel.

During 1994, I paid all 12 mortgage payments from my personal checking account and paid the first three payments in 1995. On April 1, 1995, the court ordered temporary support arrangements and gave my wife enough money to pay the mortgage herself, which she has been doing since that date.

In 1993, we filed a joint tax return. In 1994, my wife filed a separate tax return without consulting me first. On that return, she deducted half of the interest and half of the real estate taxes (about $10,000), without consulting me or my accountant.

Her accountant says that since she owned half the house, she is entitled to half the deduction, even though she did not pay the mortgage payments during that year. Since I made all of the mortgage payments in 1994, and part of them in 1995, can I take a deduction for them?

Answer:

You can. When a married couple files a separate tax return, only the spouse actually making the payments on the mortgage and property taxes is entitled to take any deduction with regard to them. Since your wife made none of the payments during these time periods, she is not entitled to any deduction under the law.

Question:

I have practiced as an unincorporated sole proprietor throughout my 20-year career. Last year, in filing my Form 1040, I noticed there was something on the front called "self-employed health-insurance deduction." My accountant had not claimed anything for this deduction. How much can I deduct?

Answer:

Under current law, you can deduct up to 30 percent of the amount paid for health-insurance premiums for yourself, your spouse and dependents, up from 25 percent in 1994. The same rule applies for doctors who are partners in a partnership or were incorporated as an S corporation where the doctor owned more than a 2 percent interest in the corporation.

The remaining 70 percent of health-insurance premiums can be taken into account for purposes of computing the amount allowed to the doctor as an itemized deduction for medical expenses under Section 213(a) of the Internal Revenue Code. That section allows medical expenses as an itemized deduction, but only to the extent that the total of all medical expenses paid personally by the doctor exceed 7.5 percent of the doctor`s adjusted gross income.

Quite simply, then, this effectively means that 99 percent of practitioners will be entitled to no medical-expense deduction as an itemized deduction on their personal income-tax returns.

Question:

Last year, my daughter got married. Unfortunately, she had no income and she and her husband moved into our home. Due to their dire economic circumstances, I still provide over half of my daughter`s support. Can I claim her as a dependent on my federal income-tax return?

Answer:

Five tests must be met for your daughter to qualify as your dependent:

1. A person must live with you for the entire year as a member of your household or be related to you, which you would certainly pass.

2. The person must be a U.S. citizen or resident, and, again, this should be no problem.

3. Your daughter cannot file a joint tax return with her spouse, unless the joint return is filed merely as a claim for refund and no tax liability would have existed for either spouse had they filed separate tax returns.

4. Your daughter cannot have gross income of $2,500 or more for the year.

5. You must provide more than half of your daughter`s total support during the year. This total support included amounts spent to provide food, lodging, clothing, education, medical care, recreation, transportation and similar necessities.

Assuming that your daughter does not file a joint return with her husband, she should meet the five tests outlined above and, thus, would qualify as your dependent.

The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings and court cases. Although the information reported herein is thought to be true and correct, there is no guarantee that the IRS will not challenge the tax treatment as set forth here. This column is not to be construed as legal or tax advice with respect to any particular situation. It is recommended that you contact your tax attorney or other adviser before undertaking any tax-related transaction.

Dr. Blair is a nationally-known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.

More in Practice Management Software