When spouses for any one of a number of reasons file separate returns many tax benefits are limited or eliminated. In addition, the spouses must separately compute taxable income, allocate tax payments and determine each spouse’s separate tax liability.
Qualifying medical expenses, not reimbursed by insurance, in excess of 7.5% of Adjusted Gross Income are deductible under Sec. 213 if paid for medical care of the taxpayer, a spouse, or a dependent.
Who is deemed to have paid a medical expense when married couples file separate returns? The answer depends on whether the spouses live in a community property state and how the account from which the disbursement is made is titled. Generally, the IRS follows the legal title in allocating income and expenses to separate returns of spouses who are treated as separate taxpayers. Thus, medical expenses paid from an account titled in one spouse’s name are allocated to and deducible by the sole owner.
Payments made from a joint account in a non-community property state are presumed to have been paid 1/2 by each spouse regardless of which spouse wrote the checks or contributed the funds to the account (see Rev. Rul. 59-66, 1959-1, C.B. 60). It is suggested in one case that a written agreement made before the payments begin stating that payments are to be deemed made by one spouse would rebut the presumption.
In community property states expenses paid from separately titled community funds would be deductible 1/2 by each spouse (Rev. Rul. 55-479, 1955-2 CB 57). The service has not specifically ruled on separately titled martial funds held in equitable distribution states. Presumably the IRS would follow its title rule and deny a medical deduction to the non-owner spouse for expenses paid from a separately titled marital account. That result seems harsh if the separate account contains undisputed marital funds such as post marriage wages. In equitable distribution jurisdictions, the non-owner spouse has a beneficial marital interest in all marital assets including bank accounts. The interest may be inchoate until a divorce court distributes the marital assets: but, proven waste committed by the owner spouse would be ordered repaid to the marital estate. Each spouse economically bears the burden of payment of marital expenses from a marital or community property bank account. It would seem relatively easy for IRS to develop a form for spouses to elect allocation of expenses paid from separately titled marital funds in equitable distribution states.
Another issue arising in separate returns involves who is considered a spouse for whom medical expenses paid may be deducted? One is considered a spouse for this purpose if he or she is married to the payor either at the time medical services are rendered or when the bill is paid (Treas. Reg. Sec. 1.213-1(e)(3). Thus, the timing of the divorce decree can be postponed if very large medical expenses have been incurred.
Often there are sound reasons for filing a separate return, for example, to avoid joint and several liability for a spouse’s perceived tax indiscretions. But, separate returns, require close examination of the requirements of law for deductions as well as the careful monitoring of income reported on Forms 1099 versus income actually received by each spouse.