On August 17, 2018, a new law was enacted, Public Act 100-923. It will be effective January 1, 2019 and is discussed below.
‘I’ve heard about the loss of the alimony deduction starting in 2019. Please explain how this will impact Illinois divorces.
The impact will be profound and complex.
What is the current (2018) law regarding alimony (maintenance) and taxes?
For divorces entered on or before December 31, 2018, alimony (maintenance) has been deductible to the maintenance payor. And the spouse receiving maintenance includes it as income for tax purposes. What this means is that generally the alimony payor has received a tax break on alimony as paid.
Are there exceptions to divorces entered before year-end 2018?
Yes, there have always been exceptions. These exceptions have included situations where the parties agree in writing as part of their divorce decree that alimony would not be tax deductible to the payor. There have been other exceptions and the law has been complex including provisions for what is called alimony recapture, etc. This post will not discuss those complexities.
What changes on January 1, 2019?
For divorces and separation agreements entered on or after January 1, 2019:
- No longer will maintenance be deductible for the spouse who pays maintenance.
- The recipient no longer includes maintenance as taxable income.
So, what’s the big deal about that…
The loss of the tax break of maintenance will have a significant negative impact on divorce cases when at least one spouse has a high tax rate. Basically, there is less money to divide in a divorce that occurs after December 31, 2018.
What about modifications of maintenance?
For orders modified after that date but where the underlying divorce was entered before January 1, 2019, generally maintenance should continue to be deductible. On the other hand, the parties could specify that the new tax law regarding how maintenance is treated would apply.
How will this impact maintenance payments?
This scheme creates any number of difficulties in those trying to craft new maintenance guidelines in Illinois.
Please provide details re the new law…
- The current law offsets 30% of the payor’s gross against 20% of the recipient’s gross with a 40% cap. This will continue for orders that are subject current tax deductibility treatment (divorces entered on or before December 31, 2018 and modifications that qualify the ability to deduct maintenance for the paying party).
- The 30% of payor’s gross will be changed to 33.3% of the payor’s net income. The 20% of the recipient’s gross would change to 25% of net income.
- There will still be a 40% of cap regarding maintenance only. But the cap would apply to net income.
- And there will likely be a new soft cap that would apply to child support or maintenance (or both) in terms of combined maintenance and child support. The soft cap combined child support and maintenance at 50% of the payor’s net income.
What is your general advice in light of these complications?
This is a critical time to consult with a lawyer because there are any number of anticipated and anticipated complexities with the new law.
I am going through a divorce this year and anticipate having to pay alimony. What is your speculation regarding whether it is better for me to get divorced this year or next year?
The committee that has been responsible for working with the maintenance rewrite had tried to approximate as much as possible the current maintenance guidelines. But in higher income cases, there remains a significant advantage to the potential maintenance payor to get divorced in 2018.
What current resources are there that help explain these issues?
A good article, if basic article, is in Accounting Today. The Columbus Day seminar (for which I am co-chair) will address, among other things, this new law in some detail.