Alimony – or “spousal maintenance” as it’s called in Colorado – refers to financial assistance given by one ex-spouse to the other after or during the divorce process. As we’ve discussed before on our blog, spousal maintenance can take several distinct forms here in Colorado; there is temporary maintenance, rehabilitative, permanent, and so forth. When it comes to the most frequently asked questions about spousal maintenance from prospective clients, questions regarding the tax implications of maintenance are close to the top of the list. In this post, we will discuss the current state of Colorado law on the tax treatment of maintenance, for both payor and payee.
Current State of the Law
Many Coloradoans are aware of that fact that Colorado underwent something of a paradigm shift in this area not too long ago. As of January 1, 2019, Colorado changed its position such that spousal maintenance payments are no longer deductible to the payor (i.e. the spouse making the payments) and no longer count as gross income for the payee (i.e. recipient spouse). Colorado law now stands as follows: if a spousal maintenance order was developed after 2018, then the maintenance payments are no longer deductible (and no longer count towards gross income); or, if the maintenance order was developed prior to 2019, but subsequent modifications specifically state that the repeal of tax deductibility applies to the modified order, then the payments are no longer deductible and no longer trigger gross income.
The Legal Definition of Spousal Maintenance
While the current law may seem straightforward enough just based on this information, Colorado law also gives additional guidelines on how to define “spousal maintenance.” The reason is because ex-spouses can often make decisions and engage in behaviors following divorce which can affect the deductibility of spousal maintenance. In other words, even if a spousal maintenance order begins as non-deductible (because of the current law), this state of affairs can change based on the behavior of the parties.
To be classified as a spousal maintenance payment, the following conditions must be present and remain present: (1) the ex-spouses cannot file a joint tax return, (2) the payments must be made in either cash, check or money order, (3) the payments must represent maintenance payments as specified in a final divorce agreement or separation agreement, (4) the payments cannot represent property division from the divorce, nor can they represent child support, (5) the ex-spouses cannot be living together when payments are made, and (6) the payor cannot be liable to make payments to the payee in the event of the payee’s death.
Simply put, these guidelines will be used if there is any ambiguity about the status or classification of a given payment. In most cases, there is little disagreement about the status of a given payment, but these guidelines can provide clarification whenever necessary.
Key Point: Old Maintenance Orders Follow Old Law
Another key point to remember is the fact that these legal changes only affect maintenance orders developed after January 1, 2019, at least under normal conditions. Maintenance orders which were developed before 2019 are “grandfathered in” with the previous law, and so payments made under old orders will remain tax deductible to the payor and includable as gross income for the payee.