When alimony is discussed by separating couples in Colorado, the tax implications may not be the first thing that springs to mind.
However, whether alimony is taxable for each party can make a big difference when the calculations are made during a separation agreement or divorce settlement.
Recent changes to the tax laws have left many divorcing couples confused.
If you’re currently going through a separation and trying to work out your financial situation as the potential payor or recipient of alimony, it will help to understand how these changes could affect you.
Alimony and tax
Alimony or “spousal maintenance” (as it is termed in Colorado) may be awarded to one spouse when a marriage breaks down and the couple goes their separate ways.
It is generally paid by the higher earner to the lower-earning spouse (according to the difference between earnings and other relevant factors) and is intended to help the dependent spouse become self-supporting.
Previously, for the payor of spousal maintenance, the amount payable was reportable as an above-the-line deduction. The IRS allowed the payor to subtract it from his or her gross income to arrive at an “adjusted gross income” for the taxable year.
For the recipient, the income was treated as taxable income. This differed from child support which does not have tax consequences.
This decades-old arrangement changed with the introduction of the federal tax reform bill known as the Tax Cuts and Jobs Act, which came into effect on January 1, 2019.
This was one of the biggest tax reform bills in recent U.S. history, affecting many areas of taxpayers’ lives, including the deductions that can be made during separation or divorce.
Changes to the alimony tax laws
The Tax Cuts and Jobs Act has made taxpayers’ ability to itemize deductions and reduce their tax burden more limited in the areas of personal exemptions, mortgage interest, state and local taxes, and spousal support.
Specifically, alimony is no longer regarded as tax-deductible for the payor and no longer counted as taxable income by the recipient:
“You can’t deduct alimony or separate maintenance payments made under a divorce or separation agreement (1) executed after 2018, or (2) executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification. Alimony and separate maintenance payments you receive under such an agreement are not included in your gross income,”
As you can see, the new laws affect not only any divorce or separation agreements made after 2018 but may also affect modifications made to spousal maintenance arrangements.
The laws have effectively closed a “loophole” that previously reduced the burden for paying spouses in Colorado and elsewhere. The tax obligations no longer “go with the income”.
If you’re worried about your alimony rights, submit a free case evaluation to our attorneys or give us a call at 720.594.7360.
What is classified as alimony?
For the purposes of clarity, alimony or spousal maintenance need to be further defined. For payments to be classified as “alimony,” they must meet the following requirements:
- Payments must be made by a spouse to a former spouse under a separation agreement or a divorce agreement
- Payments must be made by cash, check or money order
- Spouses cannot live together when payments are made (special conditions apply)
- Payments cannot be child support or a property settlement
- In the event of the supported spouse’s death, the paying spouse does not make a payment in cash or property to the supported spouse
- Spouses cannot file a joint tax return together
Payments made either voluntarily or outside the terms of the divorce agreement do not count as alimony.
How do the changes affect your divorce or separation agreement?
Previously, the tax laws assisted the payor and “softened the blow” for many having to make regular spousal maintenance payments.
Now, a heavier burden has been placed on the paying spouse and this will need to be taken into account when spousal maintenance arrangements are discussed and calculated in Colorado.
The federal tax bracket system means that the more money a person makes, the higher the percent is payable in taxes. The payor spouse used to receive the benefit of the deduction, but now that is no longer the case. The new law will push more payers of alimony into a higher tax bracket, as opposed to the old law where the lower-income earner declared the support payments as income.
This, of course, means that the IRS collects more tax on the same amount of money. This also means that the payor spouse has already paid taxes on the maintenance before it is paid to the recipient.
But it is worth noting two things here:
Firstly, Colorado law does allow and require judges to consider the tax implications of spousal maintenance when reaching its decisions on maintenance.
AND
Secondly, the formula for calculating spousal maintenance has been modified by the Colorado Legislature to account for changes to the tax deduction rule. This modification essentially adjusted the guideline support down to account for the tax implications.
Get help with alimony
If you’re currently going through a separation or divorce and are unable to agree on alimony or other aspects of your agreement, seek help from one of the experienced divorce lawyers at Colorado Legal Group.
We can advise you of your options and walk you through the process of calculating how much alimony is payable.
Submit a free case evaluation to our attorneys or give us a call at 720.594.7360.