HOW ARE MODIFICATION OF MAINTENANCE ORDERS TREATED BY THE IRS POST DECEMBER 31, 2018 IN COLORADO?
As is common with many such questions, that answer will start off with the proverbial, “it depends.”
Old LawPrior to the enactment by the U.S. Congress of Pub. L. 115-97 (the December 22, 2017 “Tax Cuts and Jobs Act”), Section 215(a) and (b) of the Internal Revenue Code provided that:
(a) In the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual’s taxable year.
(b) For purposes of this section, the term “alimony or separate maintenance payment” means any alimony or separate maintenance payment (as defined in section 71(b)) which is includible in the gross income of the recipient under section 71.
Thus, under prior tax law, alimony or separate maintenance payments were generally deductible from the gross income of the paying ex-spouse in the year of payment, and correspondingly included in the receiving ex-spouse’s gross income in the year of payment.
New LawThe Tax Cuts and Jobs Act repealed Section 215 of the Internal Revenue Code, but not completely. The repeal is effectively only as to: (a) any divorce or separation instrument (as defined in former section 71(b)(2) of title 26, U.S.C., as in effect before Dec. 22, 2017) executed after Dec. 31, 2018, and to such instruments executed on or before Dec. 31, 2018, and modified after Dec. 31, 2018, if the modification expressly provides that the amendment made by section 11051 of Pub. L. 115–97 applies to such modification. See Section 11051(c) of Pub. L. 115–97, set out as an Effective Date of 2017 Amendment note under section 61 of this title.
Thus, if you have a pre-January 1, 2019 separation agreement which you are modifying, federal taxation of payments of maintenance thereunder will be construed under the old IRC Section 215 (deductible by the payor, includable by the payee), unless you elect to be treated under the Tax Cuts and Jobs Act (100% taxable to the payor).