How the Tax Cuts and Jobs Act of 2017 Could Affect Your Decision Making on When or if to File for Dissolution of Marriage.

For any dissolution of marriage (“divorce”) action finalized prior to December 31, 2018, spousal maintenance (also known as “alimony,” but that term is not used in Colorado), can be tax deductible to the payor and taxable to the receiver.  “Can” is the operative word because the parties can agree to have the spousal maintenance non-taxable to the receiver (in my experience, I have seen that happen one time – usually the paying spouse wants his or her deduction). 

The Tax Cuts and Jobs Act of 2017 makes spousal maintenance non-deductible to the payor and non-taxable to the receiver.   

Colorado has a maintenance statute (§ 14-10-114, C.R.S.) which gives “guidelines” for maintenance calculations.  Pursuant to this statute, spousal maintenance is calculated as follows: forty percent of the higher income apouse's monthly adjusted gross income less fifty percent of the lower income spouse's monthly adjusted gross income; except that, when added to the gross income of the recipient, shall not result in the recipient receiving in excess of forty percent of the parties' combined monthly adjusted gross income.  “Income” means the actual gross income of a party, if employed to full capacity, or potential income, if unemployed or underemployed.  § 14-10-114, C.R.S.  There are income caps in the statute but for purposes of this blog, I am assuming there are no income limits.

I have run a few scenarios using the new tax rates and comparing the tax payment to whether or not the spousal maintenance is deductible to the paying spouse.  These scenarios are based on very general criteria which have many variables that I have not necessarily considered in the examples (child support should also be considered but it is not addressed here).  These examples are meant to show generally what non-deductible maintenance looks like to the payor.

In these examples, the higher wage-earning spouse will be called Terry and the lower wage-earning spouse will be called Sam.  All income used is considered taxable after deductions and write-offs. All tax rates are based on the new tax rates and as single filers.  Tax rates are copied below.   I hope my numbers are correct – I am a lawyer and not an accountant for a reason.   Also, keep in mind that a maintenance award is NOT mandatory and a lot of factors go into what if any maintenance should be ordered, over and above just the guidelines themselves.

Example 1: 

Terry has $100,000 per year of taxable income. Sam earns minimum wage ($19,344 per year).  Based on the guidelines from § 14-10-114, C.R.S., Terry would pay Sam $2,527.33 per month in spousal maintenance.  ($100,000/12*40% [$3,333.33] - $19,344/12*50% [$806] = $2527.33).

Terry’s tax burden will be $18,289.50.   Sam’s tax burden will be $2,130.78 for a total tax of $20,420.28.   With no maintenance deduction, Terry has net income after taxes and maintenance of $51,382.50.  Sam has net income of $49,672.00.

If Terry could deduct the spousal maintenance and Sam has to include it, Terry’s tax burden would be based on a net income of $69,672 which changes Terry’s tax burden from 24% to 22% and Sam’s income would be $49,672 which changes Sam’s tax burden from 12% to 22%.  If Terry were to deduct the maintenance payment and Sam were to recognize the maintenance, Terry’s tax burden would be $11,267.34 and Sam’s tax burden would be $6,867.4 for a total tax of $18,134.68.   With the deduction, Terry has net income after taxes and maintenance of $58,404.66 and Sam has $42,804.66 in net income. 

Example 2: 

Terry has $200,000 per year of taxable income. Sam has $25,000 of taxable income.  Based on the guidelines from § 14-10-114, C.R.S., Terry would pay Sam $5,625.00 per month in spousal maintenance.  ($200,000/12*40% [$6,666.67] - $25,000/12*50% [$1,041.67] = $5,625.00).

Terry’s tax burden will be $44,928.00.   Sam’s tax burden will be $2,809.50 for a total tax of $47,107.50.   With no maintenance deduction, Terry has net income after taxes and maintenance of $88,202.  Sam has net income of $92,500 (notice the lower wage-earning spouse now becomes the net higher income-earning spouse).

If Terry could deduct the spousal maintenance and Sam must include it, Terry’s tax burden would be based on a net income of $132,500 which changes Terry’s tax burden from 32% to 24% and Sam’s income would be $92,500 which changes Sam’s tax burden from 12% to 24%.  If Terry were to deduct the maintenance payment and Sam were to recognize the maintenance, Terry’s tax burden would be $26,089.50 and Sam’s tax burden would be $16,489.50 for a total tax of $42,579.00.   With the deduction, Terry has net income after taxes and maintenance of $106,410.50 and Sam has $76,010.50 in net income. 

Example 3: 

Terry has $500,001 per year of taxable income. Sam earns minimum wage ($19,344 per year).  Based on the guidelines from § 14-10-114, C.R.S., Terry would pay Sam $15,860.70 per month in spousal maintenance.  ($500,001/12*40% [$16,666.70] - $19,344/12*50% [$806] = $15,860.70).

Terry’s tax burden will be $150,689.50.   Sam’s tax burden will be $2,130.78 for a total tax of $152,820.28.   With no maintenance deduction, Terry has net income after taxes and maintenance of $158,983.10 (yes, that is just under 32% of Terry’s gross income).  Sam has net income of $209,672.00.

If Terry could deduct the spousal maintenance and Sam must include it, Terry’s tax burden would be based on a net income of $309,672.60 which changes Terry’s tax burden from 37% to 35% and Sam’s income would be $209,672.00 which changes Sam’s tax burden from 12% to 35%.  If Terry were to deduct the maintenance payment and Sam were to recognize the maintenance, Terry’s tax burden would be $84,074.88 and Sam’s tax burden would be $49074.8 for a total tax of $133,149.72.   With the deduction, Terry has net income after taxes and maintenance of $225,597.73 and Sam has $160,597.56 in net income. 

The obvious (and cynical) take away from these examples is if you are a higher wage-earning spouse and are thinking of filing for divorce then it would be a better option to file as soon as possible in 2018.  Depending on the complexity of the issues, the entire process could take the entire year.  If you are the lower wage-earning spouse then it would benefit you (assuming you are not in an abusive relationship) to stick it out until after the first of October of 2018 before filing for Dissolution of Marriage.   Of course, you always have the option of staying together and trying to make the marriage work, but if that is not possible, maintenance implications are going to be a factor.

As the maintenance statute (§ 14-10-114, C.R.S.) was written when maintenance was deductible to the payor, it will be interesting to see if the legislature makes any changes to the statute and/or if the Courts give any deference to the paying spouse for benefit of having to pay the tax.

Single

< $9,525 10%

$9,526 - $38,700 $952.50, plus 12% of the excess over $9,525

$38,701 - $82,500 $4,453.50, plus 22% of the excess over $38,700

$82,501 - $157,500 $14,089.50, plus 24% of the excess over $82,500

$157,501 - $200,000 $32,089.50, plus 32% of the excess over $157,500

$200,001 - $500,000 $45,689.50, plus 35% of the excess over $200,000

$500,001+ $150,689.50, plus 37% of the excess over $500,000

Head of Household

< $13,600 10%

$13,601 - $51,800 $1,360, plus 12% of the excess over $13,600

$51,801 - $82,500 $5,944, plus 22% of the excess over $51,800

$82,501- $157,500 $12,698, plus 24% of the excess over $82,500

$157,501 - $200,000 $30,698, plus 32% of the excess over $157,500

$200,001 - $500,000 $44,298, plus 35% of the excess over $200,000.

$500,001+ $149,298, plus 37% of the excess over $500,000

Married

< $19,050 10%

$19,051 - $77,400 $1,905, plus 12% of the excess over $19,050

$77,401 - $165,000 $8,907, plus 22% of the excess over $77,400

$165,001-$315,000 $28,179, plus 24% of the excess over $165,000

$315,001 - $400,000 $64,179, plus 32% of the excess over $315,000

$400,001 - $600,000 $91,379, plus 35% of the excess over $400,000

$600,001 + $161,379, plus 37% of the excess over $600,000

The entire Bill can be found here: http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf

<!-- @page { margin: 0.79in } P { margin-bottom: 0.08in } A:link { so-language: zxx } -->

 


Recent Posts

 -

The following is a case we recently won for our client, the Defendant in this case. The case involves Defamation ...
Learn More