What’s the difference between paying support and paying the mortgage and net support? Tax implications play a significant role in determine the best option for the payer and the receiver.
If your client is required to pay support and is still obligated on the mortgage during or after divorce, and pays the mortgage loan directly (paying the net remainder of the support to their ex-spouse), then there may be tax consequences to consider for both your client and their ex-spouse as the settlement terms are prepared.
Support (or alimony) payments are tax deductible for the payer and taxable to the receiver. However, if the payer selects to pay the mortgage directly, then only a portion of the mortgage payment is tax deductible to the payer (and a portion to the receiver).
To assess the tax implications, a little math is necessary:
By taking this approach, the receiver of support is gaining significant additional financial benefit while the payer is increasing their tax obligations slightly. Scenario planning can help optimize the total support amount received, which may benefit both parties.
Attorneys for both of the divorcing spouses should take these tax implications into consideration when establishing the terms of the settlement agreement. By comparing different options, they are better able to derive the most beneficial outcome for their clients. A Certified Divorce Lending Professional (like me) can work with divorcing individuals and their attorneys to assess scenarios such as these during the divorce process.