A recently passed bill overhauls many aspects of our tax code. If you are receiving or paying alimony (also known as spousal support or spousal maintenance), or if you are considering divorce in the near future, these tax changes may likely affect you. Here are answers to some of the essential questions you may have on how the new tax changes affect Colorado alimony.
How will the tax code changes affect spousal support?
Under existing tax rules, the spouse paying alimony is given a tax deduction while the spouse receiving alimony is required to declare this payment as taxable income. The new tax reforms reverse this. Once the tax changes are implemented, the alimony payer will no longer enjoy the tax deduction while the alimony receiver will no longer be required to pay income taxes on the alimony.
These tax code changes will apply to divorces, separation agreements, and maintenance awards entered on or after January 1, 2019.
Will my current alimony need to be changed?
If you are currently paying or receiving spousal support, your alimony arrangements do not have to change. The paying spouse will continue to get tax deductions and the receiving spouse must continue paying income tax – even after 2018. As mentioned, the tax changes apply only to divorces and maintenance awards entered in 2019.
What if my spousal maintenance gets modified in 2019?
If you and your former spouse decide in 2019 that you need to have your spousal support modified, the reformed tax code will not necessarily affect your modifications. As long as your initial maintenance award is entered before 2019, you are not required to follow the new tax rules.
However, you and your former spouse may be allowed to decide for yourselves whether to follow the new rules if you modify your spousal support in 2019. In other words, when it comes to 2019 spousal support modifications, the new tax rules will be an option, not a requirement.
Will the tax code changes affect my pre-nuptial agreement on alimony?
You and your spouse may have signed a pre-nuptial agreement before you got married, and that pre-nup probably includes a provision on spousal support. Under the current tax rules, which provide tax deduction to the spouse paying alimony, you or your spouse may have agreed on a higher amount for alimony should you get divorced. The tax deduction is an incentive for the paying spouse to agree on this higher amount.
But in the event that you go through divorce in 2019, the new tax reforms will be in effect. Does this mean that the spouse paying alimony has to pay the high amount specified in your pre-nup, but without the anticipated tax deduction?
In Colorado, this doesn’t have to be the case. It is fortunate that Colorado courts review pre-nuptial agreements, particularly provisions on spousal maintenance. A judge has to consider the circumstances at the time of divorce, and decide whether a pre-nup agreement is still fair and reasonable. So if your divorce takes place in 2019, the judge will consider the tax changes before deciding on your spousal maintenance.
The sweeping tax changes certainly pose many questions and imply many things, especially for divorcing couples. If you have any concern about the effects of these new tax rules on your divorce, don’t hesitate to talk to a family law attorney to provide you the appropriate guidance.