Since time immemorial, maintenance has been tax-deductible to the payor (deduct on line 31 of the IRS Form 1040), and taxable to the payee (add to income on line 11). As a result of the 2017 “Tax Cut and Jobs Act,” that is no longer the case for decrees entered on January 1, 2019 onwards.
What does this mean for existing decrees? Nothing – you fall under the current system. If you’ve been paying alimony under a decree entered in 2018 or earlier, maintenance continues to be tax-shifting.
Hurry up for Tax-Free Alimony
But new decrees entered on or after 1/1/2019 fall under the new system, so while those lines will still exist on the 1040, they will not apply to new decrees. Alimony paid under the new system will not be tax-deductible to the payor, nor deductible to the payee.
If you obtain your decree of dissolution in the next 4 days (i.e. by next Monday 12/31/2018), you fall under the current system where maintenance is tax-shifting. And the popular press is full of articles warning people to finish up their divorces now to lock in the current system.
The Colorado legislature has stepped in to modify both the spousal support and child support statutes to reflect this new tax reality. In HB 18-1385 which adds new language to the advisory maintenance language in C.R.S. 14-10-114(3)(b)(I):
“(b) If the maintenance award is not deductible for federal income tax purposes by the payor and not taxable income to the recipient, the amount of maintenance under the advisory guidelines for parties with a combined, monthly adjusted gross income of ten thousand dollars or less is equal to eighty percent of the amount calculated pursuant to subsection (3)(b)(i)(a) of this section.
(c) if the maintenance award is not deductible for federal income tax purposes by the payor spouse and not taxable income to the recipient spouse, the amount of maintenance under the advisory guidelines for parties with a combined, monthly adjusted gross income of more than ten thousand dollars but not more than twenty thousand dollars is equal to seventy-five percent of the amount calculated pursuant to subsection (3)(b)(i)(a) of this section.”
Simply put, the advisory maintenance amount is reduced by 20% when the parties’ combined AGIs are $120,000/yr or less, and reduced by 25% above that threshold.
Tax-Free Maintenance Affects Child Support
The Colorado child support guidelines have also been modified. C.R.S. 14-10-115(3)(a)(II) provides that if alimony is taxable, the full amount is deductible as normal, but if not deductible, then the payor receives a 1.25 multiplier against the amount actually being paid. This means, for example, that a $1000 maintenance obligation which is not tax-deductible results in $1250 being deducted from the payor’s income for purposes of child support.
And the same happens in reverse for the payee: per C.R.S. 14-10-115(5)(a)(I.5), non-taxable spousal support is plussed up by that same 1.25 multiplier, so that $1000 of tax-free maintenance received is treated as $1250 of income.
While this is understandable, it is also curious in that the child support has long treated all income the same, whether taxable or not (e.g. military BAH may result in thousands of dollars of tax-free income per month, but a dollar still counts as a dollar w/o any multiplier).
Our maintenance article in the Colorado Family Law Guide has been revamped to include a lengthy discussion of this new change.
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