Maintenance: Who’s Income Is It?
Trump's tax plan changes how maintenance will be taxed. Maintenance (formerly know as Alimony) allocation as income has changed.
MaintenanceIn Colorado, maintenance (formerly known as alimony) is intended to help ease the financial burdens associated with divorce. A financially disadvantaged spouse married for 3-years (or more) can request maintenance. In the past, Judges had very little guidance in determining when to award maintenance and even less regarding the amount or length of payments.
The lack of legislative guidance produced dramatically inconsistent results within the same jurisdiction as well as across Colorado. The current guidelines were created to promote uniform application of maintenance throughout the state. A spreadsheet based on the current guidelines calculates maintenance using the length of marriage and the parties' income. The guidelines have produced more consistent results.
Today, maintenance is routinely awarded when one spouse is financially disadvantaged and the other has the means to pay. Maintenance is a function of the parties' income and length of marriage. Except in extraordinary circumstances, maintenance is only available for marriages of 3-years or more. The guidelines begin at 3-years (or 36-months) and cover to 20-years (or 240-months).
How much? For how long?At 3-years, the guidelines maintenance term is 31% the length of the marriage, or 11-months. The guidelines cover monthly increments from 36-months (3-years) to 240-months (20-years). The percentage gradually increases from 3-years at 31% until a 12.5-year marriage's term equals 50% or 71-months. The percentage remains 50% from 12.5-years (or 150-months) to the end of the chart at 20-years (or 240-months).
Marriages over 20-years are subject to judicial discretion. Some Judges use the "50% rule" meaning maintenance payments last for half the length of the marriage (30-year or 360-month marriage=15-years or 180-months of maintenance). Other Judges require maintenance payments for the life time of the disadvantaged spouse. A very scary prospect for the breadwinner and it recently became even more troublesome due to Trump's recent tax reform.
Trump's tax reform takes effect in January 2019 and will change how maintenance is taxed by the IRS. Historically, the IRS allocated maintenance as income to the recipient. The spouse paying maintenance at least got to deduct the full amount pre-tax. However, after January 2019, the spouse paying maintenance will be taxed as if the maintenance was their income. This is a big change that can have significant tax ramifications especially for longer marriages with significant assets.
The purpose of the change is unclear. Under Trump's new law, the IRS theoretically will collect more revenue because the spouse with the higher income will not be allowed to deduct maintenance payments. Certainly, the new law helps the disadvantaged spouse because they get to keep the full-value without being taxed.