Tax season is coming up, and those in Colorado who have been paying spousal support over the past year may be looking forward to deducting these payments on their 2017 taxes. However, with the advent of the Tax Cuts and Jobs Act comes uncertainty in what was once a certain world. Formerly, while state laws varied regarding how much spousal support to award and how long payments will last, one thing that all states had in common was that those paying spousal support could deduct these payments on their annual income taxes, and those receiving spousal support will be taxed on those payments.
However, the Tax Cuts and Jobs Act, which was passed in 2017, means big changes in the area of tax law and spousal support. Under the Act, starting in 2019, when a couple divorces, the party awarded spousal support no longer will be taxed on those payments, and the party paying spousal support will no longer be able to deduct these payments.
This is problematic in the realm of divorce mediation, as the tax breaks for spousal support payers was often a good bargaining chip that helped the parties settle their divorce out-of-court. Some are wondering if, with this bargaining chip gone, fewer settlements will be reached. There are also concerns about people being unable to afford a divorce with these tax breaks gone, people receiving less in the way of spousal support and people being unable to fund their retirement accounts using spousal support payments.
As this shows, there are many uncertainties regarding the new tax law. It remains to be seen exactly how this new law will affect those trying to mediate their divorce. Still, even with the changes to the tax law when it comes to spousal support, it may be possible for couples who wish to settle things out-of-court through divorce mediation to reach an agreement that benefits them both.
Source: CNBC, "Loss of alimony tax break in GOP bill may add to the financial pain of divorce," Annie Nova, Feb. 4, 2018