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Marital status and the mortgage interest deduction, part 1

Like it or not, marital status has tax implications.

One aspect of this is the so-called "marriage penalty," under which certain couples end up paying more in taxes when filing jointly than they would have if each person had filed separately.

In this two-part post, we will consider a recent court case that addressed another way in which marital status affects taxes. The case, called Bruce Voss and Charles Sophy v. IRS, concerned the use by an unmarried couple in California of the federal tax deduction for home mortgage interest.

Federal law allows for home mortgage interest to be deducted on a mortgage up to $1.1 million. This is the limit for single people, as well as for married couples who are filing a joint tax return. If the members of a married couple choose to file separately, each member gets to deduct mortgage interest up to $550,000.

In the Bruce Voss and Charles Sophy case, the question was the extent of the mortgage interest deduction for people who jointly own a house but aren't married. The IRS and the U.S. Tax Court said the limit only went up to $1.1 million. In other words, the deduction limit is per house, not per taxpayer.

But the Ninth Circuit disagreed. The court said the $1.1 million limit was per taxpayer, not per house. This was the case despite the fact that the homeowners in the case were registered domestic partners under California law.

In part two of this post, we will discuss the peculiar practical and policy implications of this decision.

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