Couples in Colorado who plan to dissolve their marriage should ask their divorce lawyers in Boulder about how a tax bill might affect alimony payments.
That is because a proposed bill aims to change the tax treatment on alimony for divorcing couples. It involves eliminating the tax break for paying spouses, as well as the taxable amount for the receiving spouse.
The current law provides a tax incentive to the paying spouse, while the recipient shoulders the taxable portion of alimony payments. The incentive makes sense for paying spouses, who normally earn more than their partner.
However, the situation would change if the tax reform bill becomes law. Since the paying spouse earns more, their income falls under a higher tax bracket. Alimony would then be paid out of after-tax dollars, while the receiving spouse would no longer have to pay taxes.
The provision serves as a tax penalty for divorce and may be considered as a “pro-family.”
The possibility of the proposal turning into law remains uncertain, yet some lawyers have already expedited the process for their clients before the end of 2017 as a safety precaution. The tax deduction would be a significant factor for settlement negotiations, as well as influencing a judge’s decision
Alimony still plays an important role in most divorces, despite statistics showing that it has become more infrequent in recent years. Data from the Internal Revenue Service showed that around 12 million tax returns in 2015 included deductions for alimony payments.
The reforms on current alimony laws might result to more than $8 billion in tax revenues over 10 years.
Whether or not the tax reforms on alimony would take effect, divorcing couples should consult with their lawyers on how they can avoid such changes that may complicate matters.