I’ve heard about the loss of the alimony deduction. Please explain how this will impact Illinois divorces.
The impact will be profound and complex.
What is the current 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 as of 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 will occur after January 1, 2019. This is because more of the total income will be taxed at a higher tax rate-the payor’s tax rate.
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.
What do you mean by this?
Some of these difficulties include:
- Trying to convert what is 30% of gross as against 20% of net as accurate as possible to what will likely be net figures. But this will not convert perfectly and will inevitably result in “winners and losers” depending on the specific percentages that are used.
- Addressing a scheme for what will occur if the parties opt into current tax code treatment for modification.
What have you heard regarding potential legislative changes that will likely become effective some time in 2019?
The goal is to have legislation amending the maintenance guidelines that would be signed into law with an effective date of January 1, 2019. Most recently, what has been discussed is a bill with provisions substantially similar to the following:
- The current law is to offset 30% of the payor’s gross against 20% of the recipient’s gross with a 40% cap. The 30% of payor’s gross may be changed to 33.3% of the payor’s net income. the 20% of the recipient’s gross may be changed to 25% of net income.
- There may still be a 40% of cap regarding maintenance only.
- And there may be added a new cap that would apply to child support in terms of combined maintenance and child support. The current thinking is to cap combined child support and maintenance at 50% of the payor’s net income.
But keep in mind that this is merely a potential outline of what the anticipated amendments to the maintenance guidelines might entail.
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 responsible for working with the maintenance rewrite is trying to approximate as much as possible the current maintenance guidelines. But in higher income cases, my speculation is that it may be a significant advantage to the potential maintenance payor to get divorced in 2018.
What current resources are there that help explain these issues?