There is an Upcoming Tax Law Change That Will Affect Federal and State Taxes on Alimony Payments for Coloradans.
Alimony (called spousal maintenance in Colorado) can a big burden, especially for the wealthiest of divorcees. But for the longest time, that burden was made less so because the paying spouse was allowed to deduct the payments from their federal taxes. But to quote a famous song, “Used to be’s don’t count anymore.”
Federal Tax Law Change
Starting in 2019, the relevant federal tax law will change. This change will alter who gets to deduct alimony payments on annual tax returns. As mentioned, the person currently paying the alimony is allowed to deduct the payments from his or her taxable income. Starting next year, the person receiving the payments will be allowed to do so tax-free.
Let’s assume you are a man paying alimony (97% of alimony payments are made by men). And let’s assume you pay $20,000 per year in alimony and are in the 25% federal tax bracket. Being able to deduct alimony payments from your federal taxes may have a double effect. First, you will automatically pay less in taxes because you can deduct the alimony from your adjusted gross income (an “above-the-line” deduction). Because you “made” less, there will be less money to tax.
However, because you can deduct the $20,000 from your adjusted gross income, you may also be moved into a lower income tax bracket, thus saving on all taxes paid because you have reduced the percentage you must pay on every dollar earned. Under the old system, the government would collect its taxes from the spouse receiving the income who would have to pay taxes on the $20,000 as if it were normal income.
However, under the new law, the payor of the alimony will no longer be able to deduct the alimony payments from their taxes and the recipient will receive the payments as tax-free income.
What about Colorado State Taxes?
Colorado is one of many states that have “conformity” with federal law for above-the-line deductions. This means that Colorado follows what the federal government does. So, when your “above-the-line” deduction goes away for federal taxes, it generally goes away for your Colorado state taxes. Put simply, you’ll be paying more in both state and federal taxes as the payor of the alimony. The recipient? The recipient will likewise be paying less in both state and federal taxes. So, the paying spouse may want to move as quickly as possible to grandfather in the tax benefits to him or herself in 2018. The receiving spouse, on the other hand, may want to delay the divorce until after the tax-law change.
How will this affect divorces in Colorado?
There are at least two schools of thought on this issue. One school thinks the new law will make divorces, and arguments for spousal support specifically, more contentious then before. After all, the more one receives in alimony, the more tax-free income there is. Additionally, since there won’t be a tax deduction, the more alimony actually costs the payor every year.
A second school of thought is that there won’t be any difference – the same two people will be fighting over the same money, and one wins and the other loses. Nothing has really changed.
In my opinion, the first school of thought will likely prove correct. It may be true that someone still wins, and someone still loses, but now the win is greater and so is the loss. Common sense says this tends to make people fight harder and make arguments more contentious.
When seeking a divorce, it is important to fully understand the laws and the standards involved. If your looking for an attorney to assist you in your divorce case, give my firm a call. I’d be happy to meet with you to review your case and discuss your best options for moving forward.