Is Alimony Taxable In Colorado: Legal Insights

If you receive or pay spousal maintenance, you may wonder if it will affect your taxes. Is alimony taxable in Colorado as income? The answer: it depends. 

Until 2018, the Internal Revenue Service (IRS) allowed paying spouses to deduct spousal support payments and required the receiving spouse to report those payments as income. However, the laws changed for divorces finalized after Jan. 1, 2019. This article delves into the complex intersection of taxes and alimony and aims to answer the key question: is alimony taxable in Colorado? 

Tax Laws and Alimony

Is alimony tax deductible for spouses who pay it?

Before 2018, alimony payments were tax deductible by the person making the payment and the receiving spouse had to claim alimony payments as income on their federal tax return.

That changed when Congress passed the Tax Cuts and Jobs Act of 2018. 

Now, alimony or maintenance payments associated with any divorce decree or separation agreement dated Jan. 1, 2019 or later are not tax-deductible by the person paying the alimony. 115 Public Law 97, 131 Stat. 2054

Additionally, the spouse receiving the alimony does not have to report it as income on their taxes.

Modifying Existing Maintenance Agreements

Before you modify an existing alimony payment, speak with an attorney about the potential tax implications.

Updated alimony agreements must explicitly state that the deduction repeal for alimony payments applies to the new agreement. If you don’t spell that out in the new arrangement, the tax burden remains on the recipient, and the payor continues to receive a deduction.

Colorado has adjusted its alimony calculations to account for the new tax law. So you’ll want to find out from your attorney which scenario would benefit you the most if you’re considering a modification. 

How Colorado Adjusted its Alimony Calculations for the New Tax Law

Since 2014, the state of Colorado has determined alimony by taking 40% of your and your spouse’s combined monthly adjusted gross income (AGI) and subtracting it from the lower-earning individual’s monthly adjusted gross income. If the final number is negative, the alimony is zero. C.R.S. § 14-10-114 (3)(b)(I)(A)

Here’s an example: 

Spouse A – $7,600/mo. AGI + Spouse B – $4,000/mo. AGI = $11,640/mo. AGI

$11,640 x .40 (40%) = $4,640

$4,640 – $4,000 = $640/mo. alimony payment

This calculation was adjusted in 2018 to account for the new tax laws. Colorado still uses the above calculation, but then it adjusts the alimony award by 75% for parties with a combined monthly AGI between $10,001 and $20,000. C.R.S. § 14-10-114 (3)(b)(I)(C)

Using today’s calculations with the above scenario, the alimony payment would be $480. 

For spouses with an AGI of $10,000 or less, the maintenance award is 80% of the calculated amount. C.R.S. § 14-10-114 (3)(b)(I)(B)

It’s Good to Know…

Colorado law allows judges to take into account the tax law and related adjustments when determining an alimony award: 

“Whether the maintenance is deductible for federal income tax purposes by the payor and taxable income to the recipient, and any adjustments to the amount of maintenance to equitably allocate the tax burden between the parties”  C.R.S. § 14-10-114 (3)(c)(XII)

What Counts as Alimony?

Not all alimony payments qualify as tax deductions. The IRS considers a payment to be alimony or maintenance if the following requirements are met:

• The spouses do not file a joint tax return with each other. If you and your spouse file a joint income tax return together, you cannot deduct alimony payments.

• The payment is in cash (including checks or money orders.) Colorado law allows for various forms of spousal support. One such form is in-kind payments to meet some or all of a spouse’s needs for food and shelter. In one Garfield County example, the wife received an in-kind payment in the form of a residence at the ranch where she kept her horses. In re Marriage of Rose, 134 P.3d 559, 560 (Colo. App. 2006) The IRS does not consider this alimony, and therefore the husband could not deduct the associated costs for tax purposes.

• The payment is to or for a spouse or a former spouse made under a divorce or separation instrument. Make sure your divorce-related documents state the amount to be paid and label it as alimony, spousal support, or spousal maintenance. These documents should also clearly label the maintenance payments as tax deductible by the paying spouse and taxable to the recipient spouse.

• The spouses are living apart and legally separated. Spousal support payments must be made after physical separation to qualify as tax deductible.

• There’s no liability to make the payment (in cash or property) after the death of the recipient spouse. Your divorce settlement must stipulate that maintenance payments end when the receiving spouse dies. The document can also spell out that the maintenance obligation ends when the paying spouse dies.

• The payment isn’t treated as child support or a property settlement. Child support payments are not tax-deductible, so make sure that maintenance payments are not tied to the support of your children. For example, if you and your former spouse have agreed that you will stop paying maintenance when your child reaches adulthood, the IRS may reclassify past maintenance as non-deductible child support. Then you would owe back taxes.

• The divorce or separation agreement does not designate the payment as not includible in gross income of the payee spouse and not allowable as a deduction to the paying spouse.

Source: Internal Revenue Service

Colorado Alimony Attorney

Divorce is already a difficult process, and being unfamiliar with the changing tax laws may compound that. If you are paying or receiving spousal maintenance, talk with an attorney before you file your taxes. Call 303-688-0944 today to begin your case assessment.