How Do Two Unmarried People Claim Mortgage Interest for Tax Purposes?
- Although Form 1098 may list two unmarried taxpayers, the form is actually provided to only one person. The Social Security number of the primary payer of the mortgage is listed on Form 1098. The Internal Revenue Service (IRS) compares the Social Security number listed on Form 1098 to the mortgage interest reported on an individual's Schedule A. Notices are issued by the IRS when the mortgage interest reported does not match an individual's Social Security number.
- One option is to alternate the interest deduction between the two taxpayers every other year. For the years where the secondary payer, or person whose Social Security number is not listed on the Form 1098, is taking the interest deduction, the primary payer should issue a Form 1098 to the secondary payer. Complete Form 1098 using the information for the primary payer of the mortgage as the recipient and the secondary payer as the payer/borrower. Report the mortgage interest paid per Form 1098 received from the bank in Box 1. File Form 1098 with the IRS so Social Security numbers match deductions taken.
- Another option is to have the primary payer of the mortgage prepare his tax return without taking the deduction for mortgage interest. Calculate the federal and state refunds or payments due. Then have the primary payer of the mortgage prepare his tax return with the deduction for the mortgage interest. Calculate the federal and state refunds or payments due. Calculate the difference made between the refunds or payments due because of the mortgage interest deduction. Split the difference between the two unmarried taxpayers.
- To avoid headaches each year at tax time, consider refinancing the mortgage and splitting it into two mortgages. Each individual can then have one mortgage listed in his name as the primary payer. The other individual can be listed as the secondary payer if needed for income and credit eligibility.
- Every piece of information included on your tax return is electronically verified by the IRS and your state for accuracy. Deductions are scrutinized just as often, if not more than, income. In the event of an audit, a taxpayer who takes a deduction she is not entitled to will not only have additional tax to pay but the added burden of penalties and interest. Penalties and interest accrue from the day the tax return was due, not the day the IRS issued the taxpayer a notice.