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How Do the Recent Tax Code Changes Affect My Spousal Support (Alimony)?

By: Jessica A. Bryant

A bill was recently passed that makes several changes to the current U.S. tax law. One such change affects the way spousal support (maintenance/alimony) is treated. Under current tax code related to divorce, the spouse paying maintenance is given a deduction on his/her taxes and the spouse receiving maintenance had to declare the maintenance received as income on his/her taxes. The new tax bill eliminates the deduction for the alimony paying spouse as well as the requirement that it be declared as income by the receiving spouse. However, this change does not go into effect until 2019. Specifically, anyone currently under an order to pay maintenance will continue to receive the deduction, even after 2019, and anyone divorced before 2019 will receive the maintenance deduction as well. For Separation Agreements and initial maintenance awards entered on or after January 1, 2019, though the paying spouse will not receive any tax deduction.

One question that arises is, how will this new tax law affect modifications of current maintenance payments. In other words, even if your spousal maintenance order was entered before 2019, if it gets modified after January 1, 2019, would the maintenance deduction go away? The answer is: not necessarily. The way the law is written, if a pre-2019 maintenance award is modified, the parties have to opt in to the new tax law. In other words, as long as your initial maintenance award is entered, or your Separation Agreement is signed, by December 31, 2018, you basically have the power to decide how maintenance payments are treated tax-wise.  Of course there would generally be no incentive for the paying spouse to opt into being governed under the new law.

Another question is what affect will this tax law change have on my pre-nuptial agreement? Some individuals decide to enter into agreements before getting married that set forth what happens to various property and/or debt items in the event of a divorce. Often, these agreements also have a provision regarding spousal support in the event of a divorce. The concern may arise, if the maintenance provision in the prenuptial agreement was entered into considering the tax implications under the prior tax law, what happens to maintenance if the divorce does not being until after 2019? In other words, the paying party may have agreed to pay a higher amount of maintenance in the prenuptial agreement, in anticipation of receiving a tax deduction, but if the divorce occurs after 2019, that party would not get the anticipated tax deduction.  Fortunately, in Colorado, maintenance provisions in a prenuptial agreement have to be reviewed by the judge to consider if they are fair and reasonable considering the financial circumstances at the time of the divorce. Thus, the argument could be made to the judge that, due to the unexpected change in the tax law, the maintenance provision in the prenuptial agreement is no longer fair and reasonable (conscionable) and, therefore, should not be followed. Phrased differently, courts are not bound by alimony provisions in pre-nuptuial agreements.

A final question that arises is: how this will affect divorces once the deduction goes away in 2019? There are two potential effects that this tax change could have. First, Colorado has a maintenance formula guideline. While the amount set forth in the guideline is not mandatory, the goal of the guideline is to give the court an idea of a reasonable maintenance award. Said guideline was adopted in 2014, under current tax code in which the paying spouse received a tax deduction and the receiving spouse had to pay taxes on maintenance. It remains to be seen whether Colorado will reformulate the guideline amount of maintenance in consideration of the tax law changes. The other effect this change may have on divorces relates to settlement discussions surrounding maintenance. In the past, the tax deduction helped aid settlement because, typically, the party in the higher tax bracket was the paying party and the recipient was in a lower tax bracket. Therefore, by allowing the maintenance deduction, it actually gave parties a larger pot of money with which to work. With the tax law changes, the receiving party will not have to pay taxes on the maintenance, but typically the receiving party is in a lower tax bracket so, overall, the tax changes reduce the pot of money the parties have to discuss during settlement talks and may make it more difficult to settle issues of spousal maintenance.  Given the tax implications to payers, it stands to reason they are not going to be able or willing to pay the amounts the might under current code.

Ultimately, since the law does not go into effect until 2019, we will have to wait to see how this plays out practically speaking, in the family law arena.  For now, those of you already paying maintenance, rest assured that your tax deduction is not going anywhere.