The Tax Cuts and Jobs Act of 2017 will be making some drastic changes for taxpayers, especially those seeking a divorce. Under current law, alimony recipients are must pay income taxes on the payments they receive, while the paying spouse deducts their payments from their taxes. However, the passage of this recent bill making it so that alimony recipients will not pay taxes on what they receive and those who pay alimony will no longer be able to deduct it when they file taxes. If you are currently going through a divorce where alimony may be involved, it is crucial that you understand how this bill can impact your divorce process and your finances.
About the Tax Cuts and Jobs Act of 2017
The new bill was proposed by Republicans in December of 2017 and was signed and supported by The President. In short, the bill takes away tax breaks for individuals paying alimony (also known as spousal maintenance), and no longer requires alimony recipients to pay income taxes on what they receive. This bill comes after the nation has supported alimony tax deductions for 75 years. The Tax Cuts and Jobs Act of 2017 will affect all individuals obtaining a divorce after December 31, 2018.
Potential Benefits
Government officials claim the Tax Cuts and Jobs Act of 2017 aims to create a financial balance after divorce, helping both spouses gain financial independence sooner. However, not everyone will benefit from this plan. In fact, it is entirely possible that this new act will seriously harm the financial situation of individuals paying spousal support.
Likely Drawbacks
This recent change to alimony tax deductions might have more than financial implications and could result in more complex, drawn-out divorces. Spouses seeking divorce will want to factor in this new tax law before they agree to any alimony payments, and many spouses asked to pay alimony will likely be even less inclined to pay what their spouse asks. This could result in a much longer negotiation process for spouses divorcing through mediation and could lead to lengthier court sessions and a more expensive, stressful process for those divorcing through litigation.
Interface with Colorado Maintenance Guidelines
In January of 2014, Colorado made big changes to the maintenance (alimony) laws. The maintenance calculation took into consideration the benefit of alimony deductibility to the payor spouse. With that benefit gone, there is a higher risk that the higher-earning spouse will get caught between the Colorado maintenance formula and the change in the federal tax code.
Timing Issues – VERY IMPORTANT
The deductibility of alimony doesn’t change until after December 31, 2018. This means that orders regarding alimony entered before January 1, 2019 will be treated the same as they have been for the last 75 years in that the payor will still be able to deduct the alimony payments for the duration of the maintenance term. You should read that again. The tax reform will not change the deductibility of maintenance if your Orders on alimony are finalized on or before December 31, 2018. Considering there is a statutory waiting period of 91 days in Colorado to get a Decree of Dissolution of Marriage, the timing of a filing for divorce is crucial to ensure the benefit of deductibility (or the benefit of receiving alimony money tax-free, depending on what side of the equation you fall).
At this point, there is no clear answer on whether a modification of alimony that was originally entered on or before December 31, 2018 would be subject to the change in the tax code. This will certainly be an issue before the courts (and IRS) soon enough.