Under Colorado law, a spouse may be entitled to financial support on a monthly basis following entry of a divorce decree. This support is called maintenance (also known as “alimony”). Currently, the spouse paying maintenance is entitled to receive a tax deduction, and the spouse receiving maintenance must pay taxes on the maintenance and declare it as income on their federal income tax return.
The proposed Tax Cuts and Jobs Act, unveiled by the current federal administration on Nov. 2, passed by the House of Representatives Nov. 16 and passed by the Senate on Dec. 2, would eliminate the deduction for maintenance (alimony) payments made to an ex-spouse for Decrees entered into after Jan. 1 (see Section 1309 of the bill).
The net effect of the proposal is that the taxation is shifted from the maintenance recipient to the maintenance payer. This shift results in more taxes being paid overall, because the spouse paying maintenance is usually in a higher tax bracket and subject to higher tax rates than is the maintenance recipient.
The end result is that maintenance candidates in a divorce can expect to receive less maintenance. The proposed loss of deduction means that there is overall less income to go around, because the maintenance payments would be made with the payer-spouse’s after-tax dollars. This would place additional strain on divorcing couples.
The current tax break for spouses paying maintenance often helps facilitate settlement between spouses on this issue. If the tax laws change, calculations for maintenance will be much more difficult, as the parties will need tax advice or attorneys that are experienced in tax matters. Mistakes in tax calculations could be costly and create burdens for the parties. The current divorce statutes are not equipped to deal with the change in the law and would need to be amended. If the proposed elimination of this deduction is approved, then family law practitioners can expect the settlement discussions regarding maintenance to increase in conflict and complexity.
Suzanne Griffiths is the managing shareholder at Gutterman Griffiths Family Law Firm. Eliza Steinberg is an associate attorney at the firm. They can be reached at ggfamilylaw.com/attorneys.