What do you need to know about coming changes to taxation of alimony/maintenance?
Most people don’t know much about alimony – a mechanism whereby a higher earning ex-spouse takes care of a lower earning ex-spouse for a period of time, variously referred to as “maintenance” or “spousal support” – until faced with divorce. Even for lawyers and judges, finding a consistent pattern to how alimony is applied in divorce is a challenge.
On top of the already complicated structure of alimony, couples contemplating divorce this summer have an additional issue to face. The federal tax law is changing for divorces, effective in 2019. At that time, alimony will no longer be a tax deduction to the payer, nor taxable as income to the recipient. However, for those divorced before the end of 2018, the existing taxable nature of alimony will continue for the duration of any payments, which can last for years.
Governor Hickenlooper recently signed a bill amending the guideline alimony formula to reflect the new federal tax law. For alimony that is not deductible, i.e., alimony that begins in 2019 or later, the guideline amount of alimony will be 75% of what it is under the current guidelines, for couples earning a combined gross income of over $10,000 per month (or 80% for couples earning under a combined $10,000). Certified Divorce Financial Analyst Tara Mohr, CFP, CDFA, noted to me recently in private conversation that under this new state law, the amended Colorado alimony guideline formula, if applied by a court or in a settlement, will penalize payers in the higher income category. By this she meant people with higher incomes would likely save more by deducting full alimony payments under the current tax law, in contrast to paying 75% of the guideline amount but out of their net after-tax funds with no deduction.
If you are currently considering filing for divorce, you currently have the limited-time option of deciding whether to pursue a decree in 2018, or wait until 2019. In Colorado it takes a minimum of 90 days to get a court order after filing a petition for divorce. Therefore, the last possible date to file and still and have the existing tax structure apply to alimony will be October 1, 2018. Please note that if you are considering pursuing a decree in 2018, it is advisable to begin preparing your filings and your settlement agreement as soon as possible, and well before the last minute, as the court may have a considerable backlog of cases to review and approve. Consider talking to a divorce attorney or mediator to learn more.
John Hoelle is co-founder of Conscious Family Law & Mediation LLC, offering collaborative divorce mediation, or legal representation with strength and integrity, in metro Denver/Boulder, Colorado.