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Alimony payments to help borrowers qualify for loans under new tax law
By Jeff Lazerson
What I think: Over the past months, I’ve written about mortgage interest deductions, limitations on deductibility of state taxes, deductibility of points and standard deductions compared to itemized deductions under the new Trump tax code.
Today, let’s learn about a whopper of a change concerning new alimony agreements. Starting Jan. 1, 2019, alimony will no longer be tax deductible for the spouse making the payments, but will be tax free for the recipient, said CPA Jeff Hipshman, partner at HMWC.
Temporary and permanent orders of support must come from a judge to be recognized under both the old and new tax rules, added certified family law specialist attorney Daniel Gold at TLD Law.
Roughly, 50 percent of marriages end in divorce. If you count second or more marriages, well that tips the scale even higher.
Gold estimates that half of divorces have spousal support agreements.
“Rough and dirty, about 25 to 35 percent of spousal income is paid in spousal support,” said Gold.
What happens if an existing support agreement changes after Jan. 1, 2019?
“We have no guidance yet on alimony stuff,” said Raphael Tulino, Internal Revenue Service spokesman.
How will the mortgage authorities look at this?
Freddie Mac’s requirements are independent of the tax law.
“Our guide does not prescribe the use of tax returns for documentation,” said Freddie Mac spokesman Chad Wandler.
In general, Freddie requires some type of written agreement, court decree or government type rule. And, Freddie wants evidence that the support has been paid for at least the last six months and will continue for the next three years.
Spokesmen for both the Department of Veterans Affairs and the Federal Housing Administration likewise do not foresee underwriting changes in respect to this updated tax code.
Fannie is currently reviewing the tax code updates to determine if any underwriting changes are necessary.
An opportunity is knocking here for lending authorities to boost mortgage qualifying even though they missed the boat far too long on spousal support payers by having a double standard.
Spousal support is currently tax deductible. The lending gods make us hit the borrower for the full spousal support payment.
Yet, underwriting for rental properties, for example, have some tax deductions that are allowed to be added back as income for loan qualifying purposes. Yet, we have to hold the full spousal support payment against the support payer even though it is deductible as a percentage of income.
The bottom line is that real-world mortgage qualifying goes up substantially for the person getting spousal support because there will be no tax owed on that money.
So, why not assist alimony recipients by boosting spousal support income to 125 percent of the actual support received? For example, a $3,000 per month alimony payment should be recognized as $3,750 in qualifying income.
After all, there is plenty of precedent for this. It is generally allowed for untaxed Social Security income and untaxed disability payments.
Fair is fair. Income discrimination should end now.
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011