The final days of 2018 are ticking down. This New Year will bring with it the full application of the federal Tax Cut and Jobs Act — the big tax reform bill passed in Congress a year ago. But what you may not realize is the new 2019 tax laws bring with them big changes for the treatment of Colorado spousal support, and it could affect your divorce settlement.
This blog post will review how changes to the U.S. Tax Code for 2018 will affect Colorado spousal support awards. It will discuss changes to alimony deductions under the Tax Cuts and Jobs Act that was passed last year and how it will affect Colorado taxpayers starting in 2019.
Federal Tax Law Affects Colorado Families
Nearly a year ago, the United States Congress went on their winter recess having just passed the Tax Cut and Jobs Act. That bill, which was signed into law by President Donald Trump before the year end, was one of the biggest tax reform bills in recent history. It made a lot of changes, big and small, that will affect how much Colorado taxpayers have to pay, and what they can do to minimize their tax obligations.
One of the biggest changes has to do with deductions — what you are allowed to subtract from your income before calculating your tax. Up until now, taxpayers could choose to take the “Standard Deduction”, which is a flat number that assumes normal life expenses and charitable giving, or “Itemized Deductions” if their life circumstances fall outside the norm.
Starting in 2019, taxpayers’ standard deductions will see a big increase:
- Married filing jointly: $24,000 (up from $13,000 in 2018)
- Single or married filing separately: $12,000 (up from $6,500)
- Heads of households: $18,000 (up from $9,550)
But the law also significantly reduces taxpayers’ ability to itemize deductions and reduce their tax burden. The Tax Cut and Jobs Act eliminated or reduced deductions for:
- Personal exemptions
- Mortgage interest (limited to $750,000 instead of $1 million)
- State and local taxes (limited to $10,000)
- Spousal support or alimony
Eliminating Spousal Support Deduction Puts Tax Burden on Paying Spouse
That last change — eliminating the deduction for alimony or spousal support paid to a former spouse — is causing big waves in Colorado divorce cases. Up until December 31, 2018, when a court orders one party to pay spousal maintenance to the other party it is assumed that the tax obligations go with the income. Since the payer doesn’t have access to the funds, he or she can deduct that amount from his or her income and then only pay taxes on what is left. Payees (the parties receiving support) are supposed to claim spousal support as income and pay taxes appropriately.
But starting with spousal support orders entered after January 1, 2019, the IRS will no longer allow parties to shift the tax burden along with the spousal support. That means the payer will still be treated as having received the income that is then paid to the payee, even when that happens automatically through an income withholding order.
2019 Tax Law Changes Mean More Taxes on Colorado Spousal Support
The 2019 tax law change means more than just a shift in who pays the tax. Colorado spousal support is based in part on each party’s actual or potential income. Where spousal maintenance is ordered it is almost always paid by the person earning more to the person earning less. Under federal tax brackets, the more money a person makes, the higher the percent they are required to pay in taxes. When the payer is in a higher tax bracket than the payee, the IRS will be able to collect more tax on the same amount of money.
What to Do About Tax Law Changes on Alimony
If you have a currently pending divorce and are worried about the effect of the tax law changes on your spousal support, you should sit down with your divorce lawyer as soon as possible to discuss your options. The IRS has said it will recognize settlement agreements on alimony entered before the end of the year even if the rest of your divorce is not finalized. If you are able to settle on a number in the next few days it could save both parties money in the long run.
The good news is that Colorado law explicitly allows judges to consider the tax implications of spousal support when determining the proper amount of spousal maintenance. One of the factors listed in the law is:
“Whether maintenance awarded pursuant to this section would be deductible for federal income tax purposes by the payor and taxable income to the recipient.”
The Colorado Legislature has also modified the formula for calculating spousal maintenance earlier this year to account for the loss of that tax deduction. However, these new laws mean Colorado families can expect changes in the way local attorneys and judges deal with spousal support awards in years to come.
At Aviso Law, LLC, our family law lawyers know how changes in the law can affect your divorce settlement. We are here to serve you and your family during the adoption process, to make sure everything is done properly and protect your financial interests. Contact us today to schedule a consultation.