Your chance to save money through taxable maintenance ends at the end of 2018, thanks to the new tax law. Let me explain the significance of this.
Under current law, you reduce your total tax bill when you shift the tax rate on the alimony/maintenance (these are the same) to that of the lower income spouse. For example, the higher income spouse, the payer, in the 24% tax bracket, pays $1,000 per month in taxable maintenance to the lower income spouse, the payee, in the 12% tax bracket. By deducting the $1,000 the payer saves $240 per month, making the net cost to the payer $760. The tax to the payee is $120, for a net of $880 spendable money each month. The overall savings is $120 per month. Uncle Sam gets less, and you save money. This is a significant amount for many as expenses increase when they go from one household to two.
Under the new tax law, which takes effect 1/1/19, the same payer will pay $1,000 in maintenance plus $240 in tax. Thus what cost the payer $760 in the taxable situation above, now costs $1,240, a $480 increase. Uncle Sam gets $240 instead of $120. The payee will get $1,000 tax free. Many a payee will rejoice at this change, not realizing, or not caring, that the bottom line effect of this change makes the payer less able to pay, which is a factor in setting maintenance whether in a non-adversarial planning type of setting such as mediation, or in a court hearing.
To put together a tax shifting maintenance/alimony plan, you must have a court order for it signed by the court and dated before the end of 2018. This means what is called a final order in Colorado, entered after your 91-day waiting period has run, and all other matters are settled and the judge has approved your agreement and signed your decree. Maintenance orders signed after the end of 2018, including modifications of older orders, may no longer shift taxes.
High Income vs Low Income
Maintenance is not usually a factor in a divorce where both parties are sufficiently self-supporting. It is a factor when one party is not fully self-supporting. Higher income divorces (or legal separations) can save a great deal of money through tax shifting, as explained in this informative article. The significance for lower income divorces is largely to make two tight budgets work by allocating that saved money where it is needed. Cooperation between the spouses can save money in making a plan in which both parties have a stake.
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