In this article, we explain changes to Illinois spousal maintenance under the new federal tax law. Going into effect after December 31, 2018, the recently passed tax bill eliminates the tax deduction for alimony payments and makes the alimony income tax-free to the recipient. At first glance, this may seem not so bad. You may be thinking, “OK, so the person receiving the alimony, typically the one making less money, is going to get more money. That’s good right?” Unfortunately, like divorce, it’s not that simple
For those who have already divorced, currently filing for divorce or for those who will file before January 1, 2019, under the previous law the ex-spouse paying alimony can deduct the expense from their federal taxes, while the ex-spouse receiving alimony payments has to claim the payments as taxable income.
That’s right, you guessed it—The Government. When looking at the rationale behind the change, the bill reads: “The provision would eliminate what is effectively a ‘divorce subsidy’ under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can.” However, this rationale is only valid when looking at a couple whose separate incomes are fairly equal and in those cases, the alimony payment is probably small. What’s important to understand is that in nearly all cases of alimony the ex-spouse making more money—and in a higher tax bracket—is paying spousal support to the ex-spouse making less money—and in a lower tax bracket. Under the current system, it makes sense financially to pay extra alimony to get the deduction on taxes. The new system suggests it is doing away with a “divorce tax bonus,” but in reality is creating a “divorce tax penalty.” Digging into the new bill reveals that the government would generate about 8 billion in revenue over the next 10 years from the change.
Judges often take into account tax deductibility and the taxable income of alimony payments when making a final decision in contested matrimonial matters. This change effectively shrinks the number of negotiable options in the face of fixed payments such as child support and may ultimately lead to less alimony awarded to the ex-spouse. The change is forcing the income of the divorced to effectively be taxed over two tax brackets even though it still has to support two people whose income has not changed. The population most affected by these changes will likely be low-income divorcees where $200 to $300 dollars a month that could be worked out under the old system will have to be carved from somewhere else, making the process of divorce all the more painful.