A frequent question asked in divorce settlements is who will deduct the mortgage interest and taxes.
Generally, if spouses file separately, then each is eligible to deduct the mortgage interest and taxes they actually paid. Absent an agreement stipulating otherwise, the source of the funds used to pay the mortgage dictates who is entitled to the deduction. Payments from a joint account are presumed to be made by each spouse, 50/50; payments from a spouse’s separate account are presumed to have been made by that spouse.
What about Use and Possession? Suppose Mom, with two children, is staying in the jointly-owned home and Dad is required to make the mortgage payments?
IRS regulations permit the personal use by any family member to inure to another family member when determining whether the house qualifies as a residence. In this situation, since the spouse’s children live in the house, Dad would be entitled to the interest and tax deduction. If there were not any children, Dad could not deduct those expenses.
Alternatively, you could structure the Maryland Separation and Divorce Agreement so that Dad could claim half the mortgage payment as deductible alimony and take a deduction for one-half of the interest and taxes.
What about payments made after the divorce? Where there’s a transfer of interest in the family home and the nonresident spouse is required to make payments associated with the home, the paying spouse may be able to deduct the payments as alimony. This is where divorce financial planning is a must. The deductibility requirements for alimony must be met and the resident spouse has taxable income. This income, however, can be offset by the itemized deductions for mortgage interest and taxes.
The issues regarding deductibility of mortgage related expenses and alimony can be very challenging. They intersect the areas of eligible deductions, title, state law, spousal agreement, and consistent tax treatment of the parties.
Faggio Financial uses state of the art technology to perform a complete analysis of any settlement scenario. Our recommendations will provide you with the most tax-efficient strategies to deal with alimony and tax deductions.
Email or call John at 410-988-7333 to start planning today.