Is Alimony Taxable in Colorado?
Taxes play a crucial role in financial decisions in a Colorado divorce. The Broomfield alimony lawyer you choose should have experience with potential tax concerns you may face, whether you pay or receive alimony. State and federal tax laws may change. Keeping informed about new tax laws in Colorado will help you prepare financially and maintain fiscal responsibility in a divorce.
Is There a Tax on Alimony in Colorado?
Taxation on alimony in Colorado depends on whether you pay or receive spousal maintenance. A higher-earning spouse generally pays alimony to the lower-earning partner to support a standard of living similar to life before divorcing. Alimony in a Colorado divorce also supports financial independence. According to HB18-1383:
- You will not pay taxes on alimony if you are the receiving spouse. The courts do not view alimony you receive as income.
- You cannot reduce your taxable income if you pay alimony. Federal tax regulations base income taxes on total earnings.
This Act applies to divorces occurring on or after January 1, 2019, and impacts divorce modifications in Colorado.
What Are the Alimony Tax Laws if I am Requesting a Modification of Spousal Support?
New alimony tax rules may apply if you request a modification to a spousal support order created before 2019. The following rules applied under the previous tax laws and remain in effect for couples divorcing before the enactment of the Tax Cuts and Jobs Act (TCJA) (Sec. 11051):
- Alimony was reported as income if you were the spouse receiving support.
- Alimony payments were not taxed as income for the spouse paying support.
An alimony modification must state that it is subject to the new tax laws. Otherwise, alimony tax laws before the creation of the TCJA may apply.
How Do Changes to Alimony Taxes Impact a Colorado Divorce?
Because the latest alimony tax laws in Colorado significantly impact divorce and alimony modifications, it is vital to secure assistance navigating a divorce and changes to prior court orders for spousal support.
Alimony Negotiations May Change
Spouses who pay alimony now face more concerns about the tax burden of spousal support after divorce. Negotiating a lower alimony payment, evaluating asset division as a substitution for alimony, and lump sum payments are often considerations to relieve additional tax burdens.
Partners Paying Alimony May Experience Increased Financial Burdens
Reducing the tax burden of higher tax brackets benefited spouses paying alimony before the alimony tax changes. Now, paying partners who owe income taxes on their total income experience additional financial strains, impacting their ability to pay alimony, potentially resulting in reduced spousal support awards.
Shifts in Retirement Planning May Occur
Paying more taxes while paying alimony can reduce a partner’s ability to apply long-term planning strategies that benefit retirement. Conversely, partners receiving alimony may now lose eligibility for income-based retirement plan contributions because they no longer pay an income tax on alimony, losing income-based benefits. Tax changes may reduce retirement accounts in marital settlement agreements.
State Laws May Impact Alimony Taxation
The tax changes above result from federal changes to alimony taxation. Specific laws may still permit deducting alimony from your taxes on the state level for qualifying individuals.
What Tax Considerations Should I Make Before Divorcing or Modifying Alimony?
Divorce, alimony, and taxes are specific to a marriage and personal finances. Always seek legal guidance from a divorce lawyer in Broomfield, Colorado before initiating a divorce.