Changes in Alimony Tax Credits for Payors

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If you are considering divorce in a marriage of over 3 years, now is a critical time to plan for maintenance obligations. 

Divorces finalized after December 31, 2018 will fall under new tax laws, removing the tax deduction for alimony payments paid.  For the last 75 years, payors of alimony (called maintenance in Colorado) were taxed on their after-alimony income and receivers of alimony were taxed on alimony as regular taxable income in addition to any other sources of earned income. 

Timing:  There is a mandatory 91 day waiting period to receive a Decree of Dissolution of Marriage in Colorado.  If you are going to pay maintenance and wish to keep the tax deduction for those payments for the duration of the court-ordered maintenance time period, you will need to file a divorce petition prior to September 2018 to ensure your case falls under the 2014 Maintenance Guideline.  This assumes the final court order is issued at the 91st day, barring any delay in the final hearing. 

In Colorado, the lower-income earner under the 2014 Maintenance Guideline receives 40% of the combined marital income less what they are earning as their own wages.  For example:

Wage-Earner Paying Alimony:
$100,000 wages per year
-$40,000 in annual alimony or maintenance payments
$60,000 taxed at the tax rate of a $60,000 per year job

Receiver of Alimony (example assumes receiver does not earn income):
$40,000 alimony taxed as their earned income at the $40,000 per year tax bracket

USA Today covered the effect of Tax Cuts and Jobs Act of 2017 in an article titled, “Exes and taxes: How the Tax Overhaul would Alter Alimony” dated December 24, 2017, stating that “The new rules won't affect anyone who divorces or signs a separation agreement before 2019.”

I anticipate a necessarily adjustment to the 60/40 combined income standard for Colorado maintenance payments ordered in 2019.  Otherwise the payor of maintenance would net significantly less than the receiver of maintenance due to paying tax on total gross earnings.  It is currently unclear if a new percentage guideline will be adopted in Colorado, or if maintenance will revert to a contractual negotiation and agreement as it had been before the 2014 guideline. 

A partial excerpt of the 2014 C.R.S. 14-10-114. Spousal maintenance - guidelines follows, providing a rationale for its enactment.  If the current legislative culture is consistent with 2014, we could expect a modification in the ratio:

(b) THE GENERAL ASSEMBLY FURTHER FINDS THAT:
(I) BECAUSE THE STATUTES PROVIDE LITTLE GUIDANCE TO THE COURT CONCERNING MAINTENANCE AWARDS, THERE HAS BEEN INCONSISTENCY IN THE AMOUNT AND TERM OF MAINTENANCE AWARDED IN DIFFERENT JUDICIAL DISTRICTS ACROSS THE STATE IN CASES THAT INVOLVE SIMILAR FACTUAL CIRCUMSTANCES; AND
(II) COURTS AND LITIGANTS WOULD BENEFIT FROM THE ESTABLISHMENT OF A MORE DETAILED STATUTORY FRAMEWORK THAT INCLUDES ADVISORY GUIDELINES TO BE CONSIDERED AS A STARTING POINT FOR THE DETERMINATION OF FAIR AND EQUITABLE MAINTENANCE AWARDS.
(c) THEREFORE, THE GENERAL ASSEMBLY DECLARES THAT IT IS APPROPRIATE TO CREATE A STATUTORY FRAMEWORK FOR THE DETERMINATION OF MAINTENANCE AWARDS, INCLUDING ADVISORY GUIDELINES FOR THE AMOUNT AND TERM OF MAINTENANCE IN CERTAIN CASES, THAT WILL ASSIST THE COURT AND THE PARTIES IN CRAFTING MAINTENANCE AWARDS THAT ARE FAIR, EQUITABLE, AND MORE CONSISTENT ACROSS JUDICIAL DISTRICTS.

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