How Will These Changes Impact Your Case?
On August 8, 2018, a new Colorado law will go into effect, changing the calculation for child support and spousal alimony. These modifications have been put in place to address the recent tax law changes signed by President Trump. Specifically, for divorce agreements executed on or after January 1, 2019, alimony will no longer be tax deductible to the payor (who is thought to have a higher tax rate), and taxable to the payee (who is thought to have a lower tax rate). Instead, the spouse paying the alimony will also have to pay all of the taxes, in theory generating more tax revenue.
So, Colorado has now adjusted its alimony guideline calculation to account for the payor’s new tax obligation. In short, guideline spousal alimony will now be calculated as follows:
- Step 1: Take 40% of the parties’ combined gross monthly incomes.
- Step 2: Subtract one-half (50%) of the lower earner’s monthly gross income from the figure resulting from Step 1. The resulting number is the gross guideline alimony amount (except that if the resulting number is negative, the gross guideline alimony amount is $0).
- Step 3: Adjust the gross guideline alimony amount downward to account for taxes by taking 80% of the amount outlined in Step 2 if the combined gross monthly incomes are $10,000 or less, and 75% if the combined gross monthly incomes are $10,000-$20,000. This will be the guideline alimony amount.
For those combined gross monthly incomes above $20,000, there is no guideline alimony formula.
However, it is important to remember that, even for income levels where there is a guideline alimony formula, the formula is just a guideline. The Colorado alimony statute (C.R.S. § 14-10-114) outlines a number of different factors to be considered by the Court when making alimony determinations, which can cause the alimony number to fluctuate greatly or not at all from the guideline calculation.
Because spousal alimony will no longer be tax deductible to the payor, the definition of income for the purpose of calculating child support must change as well. Child support and alimony are intertwined, as child support is calculated using each party’s gross income, which includes spousal alimony. For a parent receiving spousal alimony, their income must be increased by the alimony payment, while the income of the parent paying spousal alimony must be reduced by that same alimony amount.
Now that there will be two different kinds of cases (those in which alimony was calculated in gross prior to the tax change, and those in which alimony was calculated net of taxes after the change), there must be an adjustment to ensure fairness under both scenarios. So, if alimony was calculated after the tax change, such that the recipient does not pay taxes on the alimony, but the payor does, income for the purposes of calculating child support will be determined as follows:
- The amount paid by the payor must be multiplied by 1.25 and then deducted from that parent’s income before calculating child support; and
- The amount received by the recipient must also be multiplied by 1.25 and then added to that parent’s income before calculating child support.
Otherwise, if the alimony paid is taxable to the recipient and tax-deductible to the payor (as was the case prior to the tax changes), the entire alimony amount is subtracted from the payor’s income and added to the recipient’s income prior to calculating child support.
With the new Federal tax changes, there will be no perfect way to calculate alimony and child support to account for each parent’s exact tax obligations. However, the amendments to Colorado law outlined here are the legislature’s best attempt to address the new requirements. For those who enter into a divorce agreement prior to January 1, 2019, they have the choice whether or not to make alimony tax deductible to the payor and taxable to the recipient. Because their decision will be honored by the IRS, perhaps the most accurate way to address the true tax consequences of spousal alimony and child support may be to resolve your divorce in the next five months.
Elizabeth Bonanno’s practice has focused on asset and business valuation, income valuation, complex divorce, parental responsibilities, child relocation, and child support matters, among others. Ms. Bonanno has been elected as a Colorado Super Lawyer® “Rising Star” in both 2017 and 2018.