How to Split the Interest When Filing Separate Tax Returns

If you live in a community property state such as Texas or California, dividing interest is simple. Community property law says half of what you earn during marriage belongs to your spouse, and vice versa. On tax returns, you split everything right down the middle. If, say, you make $97,000 and she makes $13,000, you report $55,000 each. The same rule applies to interest. If your joint investment brings you a $500 return this year, you each report $250.

A big exception to the community property rules is when you or your spouse has separate property. If, say, you put your money in an investment before marriage, the investment -- a rental house, a bond issue, whatever -- is yours alone, instead of divisible marital property. After you marry, some states count the interest the property earns as separate income. In that case, you report 100 percent of it on your tax return. In other states, it's part of the community property, so you divide it as usual on your return.

If you're not in a community property state, defer to state and local law in the way you divide up any interest. Generally, if you invested 35 percent of the money, you report 35 percent of the interest; your spouse gets the other 65 percent. With a joint bank account that entitles each of you to 50 percent of the funds, you each report 50 percent of the interest. If state law specifies some other division, play along with the law.

If you and your spouse want to deduct mortgage interest on your return, the Internal Revenue Service limits your deduction to what each of you pays. If you each contribute 50 percent, you deduct 50 percent. If you pay all the interest, you deduct all the interest, except in community property states where you split it evenly. Another exception is if you use joint marital funds to pay. If one of you makes all the payments but does so out of a joint checking account, you divide the interest equally.