The Why What And How Of Grossing Up Income
We see that our search traffic is asking questions about grossing up income,;so we decided to put this article together to help answer this common question. ;Although not difficult, many people just guess if a borrowers income qualifies to be grossed up.; This articles;main purpose is to inform and educate on how to gross up, what is eligeable to be grossed up, and why you would want to gross up an income.
Va Disability Benefits Are Not Considered An Asset In A Divorce
The Uniformed Services Former Spouses Protection Act exempts VA disability benefits from being divided during a divorce.; In other words, VA disability compensation is not an asset that a judge can divide as marital or community property.; It is important to note that this is different than the treatment of military retirement benefits, which can be a marital asset subject to division by a family court.
See What You Qualify For
Answer a few questions below to speak with a specialist about what your military service has earned you.
Chris Birk is the author of The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.
An award-winning former journalist, Chris writes about mortgages and homebuying for a host of sites and publications. His analysis and articles have appeared at The New York Times, the Wall Street Journal, USA Today, ABC News, CBS News, Military.com and more.
More than 300,000 people follow VA Loans Insider, his interactive VA loan community on Facebook.
You May Like: How Much Is 20 Va Disability
Federal Taxes On Veterans’ Disability Or Military Retirement Pensions
Benefit Fact Sheet
Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and Veterans’ benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income.
Service members with service-connected disabilities may be eligible for Federal income tax exclusions of Veterans’ benefits and disability pension payments.
Military Retirement Pay
Military retirement pay based on age or length of service is taxable and must be included as income for Federal income taxes. The amount a Retiree pays to participate in the Survivors Benefit Plan is excluded from taxable income. For Social Security tax purposes, military retirement pay is not considered earned income and no Social Security payroll taxes taxes) are withheld from military retirement pay.
Military Disability Retirement Pay
Military Disability Retirement Pay received as a pension, annuity or similar allowance for personal injury or sickness resulting from active service in the armed forces should not be included in taxable income if any of the following conditions apply:
You would be entitled to receive disability compensation from the Department of Veterans Affairs if you filed an application for it .
Veterans Benefits
Veterans’ benefits are also excluded from Federal taxable income. The following amounts paid to Veterans or their Families are not taxable:
How To Enter Short
According to the IRS, short-term disability income received under your employers plan is considered part of your salary. Therefore, your employer is obligated to report this income and issue you a W-2 reflecting these payments. Whether your short-term disability payments will be considered taxable or not will depend on how your disability insurance premiums are paid. If your employer pays the premium in full, your benefits are taxable, and if you pay the premium in full, your benefits are not taxable. If both you and your employer share paying the premium, your taxable benefits will be proportionately calculated.
Don’t Miss: How Does Va Disability Compensation Work
Using Disability Income To Qualify For A Mortgage
April 5, 2015 by Justin McHood
You have heard the stories stating that you need to be gainfully employed for at least 2 years before a mortgage lender will look at your application, but what happens if you receive disability income? Are you automatically denied? The good news is that disability income is able to be used for almost any type of loan available today, including FHA and VA loans. The bad news is that you will have some legwork ahead of you to prove your ability to afford the mortgage with your income. If you need your spouses disability income to qualify for a loan, you should be ready to be able to prove the income and your eligibility.
Boosting Your Income For A Va Loan
Boosting Your Income for a VA Loan
VA loans review income as part of the loan approval process and while income for VA loans is examined in much the same fashion as application for other loans such as FHA or conventional mortgages, such as using gross monthly income to establish affordability instead of take home pay. This method has long been established as part of the loan approval process. And while it sort of doesnt make sense, one would think a lender would use net income instead of gross income, its still the tried and true approach.
Deductions and withholdings can vary based upon a variety of factors. But if youre trying to boost your income in order to help qualify, theres the notion of increasing your monthly income if you have some or all of your income that is non-taxable.
Lenders will take a borrowers non-taxable income listed on a pay check stub and multiply that amount by 1.25 and use that figure when reviewing the loan. Simply, if the borrower has $1,000 per month in non-taxable income, the lender will use $1,250 as the qualifying income instead of $1,000. So what types of income is considered non-taxable?
If youre active duty, your base allowance for housing is non-taxable.; Your base pay is taxable, but your BAH, BAS and COLA is not. If you receive disability payments, those payments might be increased for qualifying purposes as are certain annuities, retirement income and other qualified non-taxable funds such as tax-free municipal bonds.
Don’t Miss: Does Short Term Disability Cover Stress Leave
Social Security Disability Income Requirements
It is possible for;either adults or;children with physical and/or mental disabilities to receive social security disability benefits. Disabled citizens are a protected class from discrimination in any way. Mortgage lending;included.;Sometimes disabled borrowers are victims of unintentional discrimination. Mortgage guidelines require a 3 year;likelihood of continuance for qualifying income.;Older mortgage guidelines required a 3 year proof of continuance to count social security disability income. Although, this was extremely difficult to prove in many cases. Furthermore, it is illegal.
Per the Consumer Financial Protection Bureau , the practice of requiring proof of disability continuance is discriminatory. The CFPB reminds lenders that disabled persons are a protected class under section B of the Equal Credit Opportunity Act ;and should be treated fairly. Even though there are limits for verification, income must be proven to count it.
What Income Can I Gross Up
What kinds of income are tax free?; The most common forms are child support and social security income.; AllRegs also cites;that any income that meets the general requirements that can be documented as tax free can also be grossed up. ;Based on this, there are very few forms of income I can think of that the government will not tax.
So how do you know if an income can be grossed up, follow these guidelines.
Child SupportSince the person paying the child support transfers the money after tax, the person receiving does not pay taxes in 99.9% of the cases.
Social Security IncomePer IRS laws social security is taxed based on the overall household income, borrowers will fall into two categories
Read Also: How Long Does Ssa Disability Last
Are Va Survivors Benefits Taxable
A VA Survivors Pension offers monthly payments to qualified surviving spouses and unmarried dependent children of deceased wartime veterans who meet certain income and net worth limits set by Congress.;;
The VA Survivors Pension, which was formerly referred to as the Death Pension, is a tax-free benefit.
Va Mortgage Question Regarding ‘grossing Up’ Income
Long time lurker here! We recently applied for a mortgage using my husband’s VA loan benefit. Got a message from the loan officer today saying that all was well so far. My husband, who is 100% disabled, receives monthly VA disability and CRSC and I receive VA caregiver pay as his caregiver. All of this is non-taxable. Thanks to whoever posted the VA guidelines in this forum, I read the guidelines and it mentions grossing up non-taxable income for the debt to income ratio only. ;I asked the loan officer and she said that the lender does not gross up VA pay or CRSC pay, only Social Security payments. Does anyone know this to be true? My understanding was that as long as it is non-taxable, it could be grossed up. ;I got the feeling that she does not know what to do since she said she is sending our file to underwriting to see what the underwriter thinks. Please help. Thank you.;
you can gross up if it is non taxable income
Don’t Miss: Can You Get Social Security And Disability
Why Do We Gross Up Income
The debt ratios set by all entities that loan money base their ratios on taxable income.; Because the average American family pays 25% of their income between federal and state taxes conventional guidelines allow 25% gross up of the non taxable income. ;Note that government loans require you to determine the actual tax bracket. ;For example most loans run through DU will not approve with a DTI over 45%.; The 55% of the remaining income is room for a person or family to pay for items not considered in the debt ratio such as food, insurance, day care, and taxes to name a few. ;What this guideline does is correct the formula for the very few forms of income that are not taxed by the government.
Child Support Alimony And Va Disability
Generally speaking, alimony is a court-ordered legal obligation for one person to provide financial support to their spouse or ex-spouse after separation.; Typically, it terminates if the spouse who is receiving that financial support remarries.; Nonetheless, it is a way for one spouse to support the other and ensure that they can provide for the child.; On the other hand, child support is basically an agreement that is made between the two parties, usually in a court setting with a judge.; Child support orders one spouse to pay the other spouse who is likely in primary physical custody of any minor children.; Similar to alimony, this monetary payment is intended to help support the raising of those kids and to give them some sort of financial benefit to help pay for food, clothing, transportation, etc.
Importantly, VA benefits can be taken into account when the court is looking at a veterans income for child support and alimony purposes.; That is, VA benefits would be counted towards a veterans income when calculating child support payments.; It is also important to consider the fact that VA benefits are tax-free.; Therefore, the entire amount of the veterans disability compensation would be considered in a family courts determination of child support.
Read Also: How Long Is Short Term Disability Insurance
Does It Matter If My Benefits Come From Ssi Or Ssdi
Yes. If you are disabled and receiving SSI benefits, you are already established as belonging in the low-income tier, and you probably wont be taxed on ANY of your income. If you are receiving SSDI benefits, and you have significant income from other sources, then you can be taxed on up to half of your SSDI benefits.
This makes sense because SSDI payments are entitlements with no income limits to qualify, while people whose income is low enough to qualify for SSI payments already dont have enough income to pay taxes.
How Mortgage Underwriters Calculate Income
Qualified income is used by mortgage underwriters to calculate debt to income ratios. Grossing up nontaxable income is important to qualify for the maximum loan amount. More importantly, in order to be considered qualified income, the income needs to continue for the next three years. The following income are normally nontaxable income that may be grossed up and used as qualified income.
- Social Security benefits
- Workers compensation benefits
- And certain types of public assistance payments
The;income;can be grossed up by 25% on conventional loans. HUD allows mortgage underwriters to gross up 15% on FHA loans.
Read Also: How To Get A Disability Rating
How Do You Calculate Gross Up Income
How to GrossUp a Payment
Benefits Of Freddie Mac Fixed Income Mortgage Guidelines On Conventional Loans
Freddie Mac, Fannie Mae, and HUD are always looking for ways to improve the mortgage process.
- As mortgage professionals, documentation is part of our day to day lives
- We do not ask for documentation just for fun
- There are very specific guidelines on what we must document from a borrower
- The mortgage process has a very strict documentation policy
So anytime we see a major player such as Freddie Mac remove documentation, we smile!
Read Also: Are Taxes Taken Out Of Short Term Disability
Free Financial Coaching For Veterans
The Bureau of Consumer Financial Protection, Office of Servicemember Affairs has a Financial Coaching Initiative focused on Veterans to;assist with their financial goals. This program places certified financial coaches in organizations around the country to provide free;individualized financial support services. The program is managed through the Armed Forces Services Corporation at various locations for Veterans in the United States and is available until the end of March 2019.
The phone number to talk to a financial coach is /. More information about this project – including where to find your coach – can be found at My Financial Coach for Veterans.
Is It Wiser To Buy Disability Coverage With Pre
There are many considerations to be made when deciding to pay your premiums with pre-tax or post-tax dollars. For example, what is the nature of your workplace? If you work in a hazardous environment where debilitating injuries are likely to happen, paying with post-tax dollars would be the wiser choice.
Accidents are always unpredictable and can be life-altering. If they do occur, you would be fortunate to receive your benefits tax-free for the duration of your short-term or long-term disability. To be prepared for the worst, it often can be beneficial to pay a little more now to receive a more substantial benefit if you experience an accident leaving you unable to work. Tax-free benefit payments could be closer to your regular take-home pay, helping you maintain financial stability while adjusting to living with your disability or illness.
If you choose to pay for your premium with pre-tax dollars and you become disabled, 100% of your disability benefits will be subject to federal income tax.
Don’t Miss: What Happens To Disability When One Turns 65
Re: Va Mortgage Question Regarding ‘grossing Up’ Income
Please file a complaint;against that lender. ;That is discriminatory lending if they are asking for gross income from everyone else, yet they dock you because you have tax free net income;from disability compensation from the Veterans Affairs department. ;Please do this and make sure this lender doesn’t discriminate against other disabled veterans. ;This is wrong and is just as bad as not lending to black people. ;They are literally saying your money isn’t as good as an able bodied person by asking for gross income and not having a comparable figure for the VA non taxed area.I’m not kidding you. Here:
Specifically where it says:
Here is where to go to file a complaint:
Which Disability Benefits Are Tax
In addition to receiving tax-free disability payments, the IRS also does not require disabled veterans to pay taxes on the benefits indicated below.
- VA grants used to make a home more accessible for veterans who use a wheelchair.
- VA grants used to design a specialty vehicle for veterans who lost their sight or the use of one or more of their limbs.
- Benefits received under the VA dependent-care assistance program.
You do not have to file any type of tax paperwork with your federal return if you receive any of these tax-free disability benefits. The IRS knows that disability benefits are free to veterans and applies the tax break automatically.
Don’t Miss: Is Brittle Bone Disease A Disability
Are There Income Limitations For Va Loans
No, the VA does not limit income for qualifying VA loan borrowers. Other government-guaranteed mortgage programs can set a maximum income amount to qualify for specific loan programs but the VA has no such requirement.
Regardless if you make $500,000 per year or $50,000 per year, VA lenders underwrite your loan in the exact same manner as it addresses debt to income ratios and affordability.
VA loans do have a unique qualifying guideline that establishes what is called residual income that VA borrowers must have.
Mortgage Programs With Higher Debt Ratios
With strong enough compensating factors, borrowers may qualify with higher than the old standard 36% maximum debt to income ratio. Actually, it is common for borrowers to receive approvals at 45%. Additionally, debt ratios up to 55% or even more is possible on VA and FHA loans! Conventional loanspotentially allow up to 50% debt to income ratio too.
You May Like: What Does Pending Processing Mean For Disability