Tax question

[MojoMan]

Here's the scenario.

 

Two individuals, A and B, own a house together but are separate legal entities. They hold title jointly. However, for whatever reason, the mortgage company and local taxing authority only report interest income and property taxes to the IRS for A.

 

Therefore, A is getting all of the income tax advantages for owing the real estate and B is not.

 

A's taxes are very simple; A just uses TurboTax.

 

A has calculated the tax return using Turbo Tax with and without the entire deduction. With the large deduction, A is getting a refund of $8000. Without the deduction, A gets $4000. Thus, using Turbo Tax, it looks like the entire tax advantage to A was $4000 and A owes B $2000.

 

However, it seems that the other way to calculate this is to use the marginal tax rate (33%) where it seems that the deduction would be relevant, calculate the tax advantage, and give half back to B. Without getting into details, by that calculation, A owes B $2400.

 

Is one more likely to be correct than the other? What is the explanation for the discrepancy? What is fair?

[KevinL]

Here's the scenario.

 

Two individuals, A and B, own a house together but are separate legal entities. They hold title jointly. However, for whatever reason, the mortgage company and local taxing authority only report interest income and property taxes to the IRS for A.

 

Therefore, A is getting all of the income tax advantages for owing the real estate and B is not.

 

A's taxes are very simple; A just uses TurboTax.

 

A has calculated the tax return using Turbo Tax with and without the entire deduction. With the large deduction, A is getting a refund of $8000. Without the deduction, A gets $4000. Thus, using Turbo Tax, it looks like the entire tax advantage to A was $4000 and A owes B $2000.

 

However, it seems that the other way to calculate this is to use the marginal tax rate (33%) where it seems that the deduction would be relevant, calculate the tax advantage, and give half back to B. Without getting into details, by that calculation, A owes B $2400.

 

Is one more likely to be correct than the other? What is the explanation for the discrepancy? What is fair?

 

I am not an accountant or tax professional but I have made understanding taxes a hobby and consider myself fairly knowledgeable.

 

There are a couple possible reasons to explain the discrepancy.

 

1) Perhaps not all of the $8000 deduction is at the 33% rate.

 

2) Perhaps without using the $8000, party A would use the standard deduction. Lets say the standard deduction is $5000 and party A has $3000 in other deductions (charity, etc). Using the $8k from the mortgage puts him at $11000, which is only a $6000 increase over the standard deduction.

 

I would think that using the actual tax liability with and without the $8k would be the most fair.

[yo mama]

We can't possibly know the reason for the discrepancy without seeing the comparative return positions. For all we know now, the difference is due to a math error or typo.

 

What I will say is this: if A and B are in a state that has a state income tax, don't forget to measure the tax benefit on the state level when calculating the overall true economic impact of the alternative situations.