There are a lot of big changes with the new tax law, and divorcing couples are not insulated from them. For couples entering into agreements that include maintenance payments as of January 1, 2019, or later, the tax treatment of maintenance (formerly known as alimony) changes significantly. If you are facing divorce, it is important you understand these changes – particularly if you may be the one paying maintenance.
Historically, maintenance payments have been tax-deductible to the payor and taxed as income to the payee. This helped equalize the incomes and make paying maintenance a little easier to swallow and afford. However, with the new tax laws, maintenance agreements entered as of January 1, 2019, will no longer be entitled to that benefit. Instead, for new agreements, maintenance is neither deductible nor taxable. Maintenance will remain taxable and deductible for those agreements entered into prior to 2019 and up until December 31, 2018.
What does this mean for divorcing couples? We have yet to see; however, most family law attorneys anticipate that negotiating the issue of maintenance will be much harder. This is particularly true because the state laws regarding maintenance have not caught up. For instance, in 2014, the Colorado Legislature implemented a new guideline for determining and calculating maintenance to help level the maintenance awards across jurisdictions and individual courtrooms. See our discussion of those changes here. Those changes, and calculations, contemplated the existing tax laws. Now, an award of maintenance will have a much different financial impact. The paying spouse will take a much bigger tax hit, while the receiving spouse will reap a larger, tax-free, reward.
How individual couples and attorneys will handle this new reality remains to be seen. Here at Snodgrass Law, LLC, we’ve got some creative ideas. Contact us to learn more and get help managing the financial impact of your divorce.