Tax and Mortgage Deduction for Joint Property

As a divorce lawyer I frequently deal with couples, who own their home jointly, and sometimes one of the parties will decide that the income tax deductions for mortgage interest expense and real estate taxes are assets that should be divided along with the other marital property. Often one will suggest that the deductions should be split evenly
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The people, who raise this point are sometimes correct, that the potential tax savings are valuable; however, frequently by dividing the tax deduction they will destroy the benefit. This is because the total mortgage interest and real estate taxes might be high enough to create a benefit for a spouse, who itemizes her deduction. However, if they split the deduction in half, both of them may end up claiming the standard deduction and the benefit is lost.

In addition the right to claim these tax deduction is not something that can be assigned. The taxpayer must actually pay an expense to take a tax deduction, and if one spouse makes all the mortgage payments, there is no provision in the Internal Revenue Code, which allows the other to claim part of the tax deduction. Furthermore, the taxpayer must have a legal obligation to pay the expense. This can be a factor with property held in tenancy in common rather than joint tenancy, if each spouse is individually liable for one half of the property tax.

Non Dischargeable Taxes in Chapter 13 Bankruptcy

Many people assume that taxes are not dischargeable in bankruptcy, and while there are provisions in the Bankruptcy Code that deny a debtor a discharge for taxes, they do not apply to all situations.
Individual income taxes will generally not receive a discharge if the bankruptcy petition is filed less than three years after the due date of the tax return, or less than two years after the date the tax return is actually filed. Income taxes will also not receive a discharge, if the debtor made a fraudulent return or willfully attempted to evade or defeat such tax.

If an individual files a Chapter 7 bankruptcy he or she will have to deal with the IRS on these nondischargeable taxes after the discharge is received. In a Chapter 13 bankruptcy these non dischargeable taxes will receive a discharge, although if the taxes are a priority debt the plan will need to provide for payment of 100% of the tax.

The key word here though is priority debt rather than nondischargeable taxes. For income tax returns that were due less than three years before the bankruptcy filing the taxes are a priority debt and the Chapter 13 bankruptcy plan will have to pay the entire tax. For taxes that are dischargeable merely because the return is filed late though the debt is not a priority debt and the Chapter 13 plan can call for the same percentage payment on these taxes as it provides for other unsecured debts.