One of the changes in the new “Tax Cuts and Jobs Act” (TCJA) affects couples contemplating a divorce where one party will likely have to pay alimony (maintenance in Colorado) to the other party. Today, the payor of maintenance receives a tax deduction and the payee pays taxes on that income. The new tax law eliminates the tax deduction for the payor of maintenance and eliminates it as taxable income for the payee.
If you file for dissolution in 2018 and get a decree of dissolution with a maintenance obligation before the end of 2018, you will have the benefit or disadvantage, of the existing law. But in 2019, the new tax law takes effect.
Under the current (pre-TCJA) rules, a divorced spouse who pays alimony may deduct the amount of those payments from their gross income as an “above the line” deduction. An above-the-line deduction is more valuable to a tax payer than an itemized deduction. So, under the current rules, a person paying alimony gets the benefit of deducting alimony payments. At the same time, the recipient of that alimony payment must include those payments in their gross income and pay tax on the alimony received.
Under the new TCJA rules, the person paying alimony may NOT deduct the amount of the payments and the recipient of the alimony does NOT include the payments in their gross income. So, under the old rules, the tax burden is shifted to the recipient of the alimony and under the TCJA rules, the tax burden remains with the person paying alimony.
Child support has always been treated this way, so now maintenance is consistent with child support. In Colorado there is a guideline of the presumptive amount of maintenance based upon income and also a presumptive duration of maintenance based upon the length of marriage. It’s possible that the change in law will have little effect overall because of these presumptive amounts of maintenance anyway; but it may have a larger effect on you.
To qualify as maintenance there are certain requirements that are applicable whether they are before or after December 31, 2018.
This Year or Next Year?
According to this article in Market Watch, “if you are in divorce proceedings and want deductible alimony treatment for some or all of the payments that will be made to the other party, the TCJA gives you a huge incentive to get your divorce agreement wrapped up and signed by 12/31/18.”
“On the other hand, if you will be the recipient of payments, you have a big incentive to put off finalizing your agreement until next year, because the payments would be tax-free to you.”
In either case, it is important to discuss your situation with your legal and tax advisors in order to ensure the best tax result for your situation.