How do you keep painted leather from cracking at the shoulder seams?

The flaking on the shoulder crease is mostly about when the crease got formed, not how you thinned the paint. Thin coats were the right call. The problem is that a shoulder seam area gets compressed and folded every time you wear it, and no amount of thin acrylic survives being bent over a hard crease line. The fix going forward is to shape that crease first: dampen the leather, work the fold in with a bone folder or just your fingers, let it dry completely, then paint. Paint over a pre-formed crease has a much better life than paint that gets creased afterward. Since you're already painted, work the crease gently by hand a few times, wipe away anything that lifts, and touch up thin. It'll need periodic touch-ups anyway, that's just how it goes on a high-flex area. A flex additive mixed into the paint does help, and so does a flexible finisher over the top once you're done. Go satin or matte, thinned a little, in light coats. Also consider leaving a narrow unpainted band right along the worst flex line and just dyeing it. A dyed crease cracks invisibly, a painted one shows every time.

On fit, some gape when you raise your arms is normal for a laced-back mantle. The lacing only controls the back seam, it can't pull the front edge down with your shoulder. If the gape bothers you, a diamond gusset set into the underarm seam is the proper fix, and it's much easier to add now than after finishing. Even a small one buys you real range of motion. A hidden strip of elastic stitched under the armhole edge works too if you don't want to cut leather. For the lacing, cross it in an X pattern instead of running it straight up, and come back through the top pair of holes to lock it. Leather stretches, so wear it around the house for twenty minutes, then retighten before you do final holes. Punch the holes a little closer together than feels neccesary and it'll snug up without riding up your neck.

Seconding the gusset advice. I put a small diamond of thin deerskin into the underarm of a mantle I made a couple years back and the arm lift went from restricted to basially full range without the whole collar shifting. I edge-painted mine instead of leaving it bare, and honestly the paint held up fine there becasue deerskin flexes soft instead of creasing hard. One thing I'd add on the lacing: I ran my top pair thru twice and tied off inside where nobody can see it, and it never loosened even after a full day of wear.

Quick follow up on the gusset thing since my own shoulder piece had the same arm problem. Mine got way worse when I wore a shirt under it, all that extra bulk pushed the edges out. Fit it over whatever you'll actually wear with the costume before cutting anything. Can you still add one of those little fabric diamonds if the edges are already painted, or do you have to redo the edge afterwards?

Update: the deerskin gusset did it. Cut a small diamond, stitched it under each arm, and the gape is basically gone even with a shirt underneath, which I wouldn't have thought to test before. Also took the point about the crease forming early. I'm flexing the shoulders over a dowel before any more paint goes on, then sealing. So far so good.