New Tax Laws Shift the Benefit for Divorcing Couples in Tamaqua

As we approach 2019, divorcing couples should take the new Federal tax laws into consideration when negotiating their divorce settlements.

 

Under the current tax laws, the advantage goes to the spouse who pays alimony. Under the new laws, the advantage will go to the spouse who receives those payments.

This shift will in turn affect each party’s ability to obtain a mortgage loan.

 

Under the old law:

• Payor deducts spousal support payments from his/her income for tax purposes.
• Mortgage lender deducts support payments from payor’s income before calculating debt-to-income ratios.
• Recipient must claim spousal support income for tax purposes.
• Mortgage lender lumps support payments in with other income for calculating debt-to-income ratios.

Under the new law:

• Payor may not deduct spousal support payments from income for tax purposes.
• Mortgage lender does not deduct spousal support from income, but adds it to debt before  calculating debt-to-income ratios.
• Recipient does not include spousal support payments in income. It is now tax-free income.
• Mortgage lender may “gross-up” spousal support income by 25% before adding it to taxable income for the purpose of calculating debt-to-income ratios.

The outcome:

In addition to the tax consequences of having more or less income upon which to be taxed, this law will significantly affect each party’s ability to get a new home mortgage loan.

 

At first glance you wouldn’t think it would affect the payor, but it does – significantly.

 

For example, here are the consequences for a person with $7,500 per month income, $2,000 in debt service payments, and $1,000 in spousal support payments.

 

Old rules: $7,500 - $1,000 spousal support = $6,500 income. $2,000 in debt service divided by $6,500 equals a debt-to-income ratio of 31%.

 

New rules: $7,500 income and $3,000 in debt service, because spousal support is now included as debt. $3,000 divided by $7,500 equals a debt-to-income ratio of 40%.

 

The recipient benefits because his/her income for debt-to-income calculation is increased by 25% of the amount of spousal support received.

 

What to consider right now:

If you are divorcing, do consult with a tax expert as well as your attorney before coming to terms on a settlement. Do also remember that a divorce finalized by December 31, 2018 will be governed by the old rules.

 

NOTE: If you need to sell the Tamaqua house you presently own together, I’ll be pleased to prepare a market analysis to show you its worth in today’s market. I’d also be pleased to bring it to market and find a buyer so you can both move on.