New Maintenance Law Takes Effect 1.1.19
January 31, 2019
On January 1, the new federal law regarding taxation of maintenance took effect. Prior to this year, maintenance (also known as alimony) paid by one ex-spouse to another was deductible from the payor’s income and includible in the recipient’s income. Congress has changed that, and now, payments for maintenance ordered after January 1, 2019 are made with after tax money. This can greatly change the effect of maintenance. When maintenance was deductible, people frequently negotiated to include more of the overall financial settlement in maintenance, because the payor was usually being taxed at a higher rate than the recipient, meaning that the payor saved more in taxes by deducting it than the taxes the recipient paid as a result of receiving it. No doubt this had something to do with Congress’ action.
Colorado responded to the change by modifying its maintenance statute. The change is meant to offset the negative effect of the federal change. To do this, the state modified the amount payable under the maintenance guideline. The guideline was originally enacted in 2014 and provides recommendations for amount and duration of maintenance. Since that was enacted when maintenance was tax deductible, the legislature provided in the revised statute that the amount of guideline maintenance is reduced by one of two percentages. If the total income of the spouses is $10,000 or less, the guideline amount is reduced by 20%. If their combined income is more than $10,000, it is reduced by 25%. This applies the same percentage tax treatment to each party, which at least avoids the result of a maintenance order which overcharges the payor, so to speak. Unfortunately, it also means that the recipient takes a loss on the maintenance which may outstrip what would have been payable when maintenance was still included in income.
The collaborative process offers a rationale way to deal with these issues, because it encourages creative problem-solving. Some (by no means all) approaches to the problem caused by nontaxable maintenance would be to look closely at the property being divided in order to apportion the tax consequences embedded in each property, or to divide property in a way which compensated a spouse for the adverse tax effects of the new laws.