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New Tax Law and its impact on Spousal Maintenance in Colorado

The Tax Cuts and Jobs Act signed into law on December 22, 2017, made sweeping changes, including scraping a seventy-five (75) year old rule regarding maintenance payments.

Under the previous tax code, the spouse paying maintenance is allowed to deduct the maintenance payments from their taxable income. The spouse receiving the maintenance payment was required to report the maintenance payment as income.

However, for any divorce agreement entered into after December 31, 2018, the opposite will be true: the payor spouse will no longer be able to claim the tax deduction and the spouse receiving maintenance no longer has to pay taxes on the amounts received.

Example

Husband is a professional and his income is taxed by the federal government at thirty-three percent (33%). Wife is a homemaker who does not earn any income. Husband agrees to pay Wife $50,000 per year in maintenance. If the parties finalize their divorce in 2018, Husband will be able to deduct the maintenance paid on his taxes resulting in a tax savings of $16,500 ($50,000 *33%) for the maintenance paid. Wife will be required to report the $50,000 in maintenance as income on her tax return.

However, if the parties' filed or settled their divorce after December 31, 2018, Husband will pay Wife $50,000 in maintenance. Husband will pay the taxes on the $50,000.00 paid to Wife. Wife will receive the $50,000 tax free.

As shown by the example, the repeal of the tax deduction will dramatically alter the landscape of divorce negotiation, as the tax deduction is a key negotiation point in a divorce settlement. Similarly, Colorado adopted a guideline formula for maintenance based under the old tax code. Colorado's maintenance formula, codified under Colorado Revised Statute ยง 14-10-114, calculates spousal maintenance obligations, assuming any amounts paid were deductible. It remains unclear if Colorado will revise the guideline amount due to the change in tax consequences. While on the surface the change appears to only negatively affect the payor spouse, it is not clear as to what impact the change will have on the spouse receiving maintenance. For example, a judge may not order as large of a maintenance payment to the receiving spouse given the change to the tax code.

The decision to file for divorce is a life altering decision that should not be taken lightly, if you are contemplating divorce in Colorado, contact one of our experienced divorce attorneys to help you navigate the changing divorce landscape.

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