Under current law, payments of maintenance (spousal support) are tax deductible
to the payor, and are taxable as income to the recipient (payee). In the
recently approved bill – Tax Cuts and Jobs Act (H.R.1) – this
provision is soon to be abolished. This change goes into effect for dissolutions
filed after December 31, 2018.
Prior to H.R.1 under IRS Sections 61(8) and 71, maintenance payments received
were included in the recipient’s (payee’s) income. Under the
new law, the payee will no long be required to include those payments
in their taxable income. It sounds like a positive change, however this
is likely to negatively impact settlement negotiations in dissolutions.
For example, if the high-earning Spouse A currently pays and deducts $30,000
a year in alimony. Spouse A’s income is federally taxed at 33 percent,
so the deduction saves him/her $9,900. Lower-earning Spouse B owes taxes
on the support at a 15-percent rate, paying $4,500 instead of the $9,900
that would be due at Spouse A’s rate. The two have saved $5,400
between them, and the tax deduction made it financially more feasible
for Spouse A to pay the support and still meet her/his reasonable needs.
Colorado law currently has a guideline which combines the marital income
then redistributes it so the lower wage earner has not less than 40% of
the marital income. This calculation was originally calculated pre tax
because each of the parties would be bearing the tax obligation on their
own incomes. Parties and their attorneys are now going to have to consider
the tax implications to the maintenance in determining whether the calculation
correctly reflects the intent of the court and the parties.
For parties currently in the process of a dissolution or legal separation,
nothing will change. However, the law is written that it applies to cases
executed after December 31, 2018, so I believe parties will push to complete
their actions prior to the end of the calendar year. It appears if a case
was completed prior to the end of 2018, but is modified in the future,
the court may apply the prior taxation rules to later modification.