In the past, maintenance payments were tax deductible by the paying party and taxable income to the receiving party. Recent changes to the tax laws that went into effect on January 1, 2019 change this dramatically.
The Shifting Maintenance Tax Burden
Under the Tax Cuts and Jobs Act of 2017, the payor can no longer deduct maintenance payments and the payee does not have to pay income tax on the payments. On the surface, this may seem beneficial to the payee. After all, not having to pay tax on any amount of income is generally considered a positive. However, it may not be that simple in many divorce cases
Previously, the tax deductible nature of maintenance payments was taken into account by payors when fashioning divorce agreements. No longer being able to deduct payments from taxes may be an incentive for the payor to attempt to pay less. Any extra the payee might have been able to keep in pocket may be outweighed by getting a smaller payment than they might have under the old tax rules. In the past, creative lawyers were able to work together to increase the net gain to families by utilizing tax deductions. The new law largely prevents the ability to do so.
The Colorado Legislature has taken steps to avoid an unjust result when applying the statutory maintenance guidelines in C.R.S. 14-10-114 through passage of House Bill 18-1385. The changes include downward adjustments to the presumptive maintenance amounts based on the parties' combined gross income, changes to the definition of income, and other amendments.
As always, however, the ultimate goal is to achieve fair maintenance payments, and that still requires careful consideration of a wide range of factors and attention to every detail, including the tax implications.
The attorneys at Scardina Law, LLC are up to date with all the changes and ready to help you find an equitable solution to your divorce issues, including maximizing the benefit to all parties in maintenance calculations.