The New Tax Cuts and Jobs Act (H.R.1) will affect Colorado Divorces and Legal Separations.
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.