In this article, we explain changes to Illinois spousal maintenance under the new federal tax law for 2019. We will discuss 2019 changes to Illinois spousal maintenance laws and answer the questions, "how is spousal maintenance calculated in 2019?", "who benefits under the 2019 tax changes for spousal maintenance?" and "what do 2019 tax changes for alimony mean for the future of divorce?"
This article focuses on the implications of the new tax law on sposual maintenance. For a broader discussion on the changes to Illinois spousal maintenance law in 2019, check out our article: Changes to Illinois Spousal Maintenance 2019. For some foundational information about how spousal maintenance law works in Illinois, check out: Illinois Sposual Maintenance 2019.
For those whose divorce judgment was entered before January 1, 2019, the ex-spouse paying alimony could deduct the expense from his or her federal taxes, while the ex-spouse receiving alimony payments has to claim the payments as taxable income.
Going into effect on January 1, 2019, the recently passed tax bill eliminates the tax deduction for the obligor's spousal maintenance payments and makes the spousal maintenance income tax-free to the recipient.
The law also includes a change to how the amount of spousal maintenance is calculated. Under the prior law, maintenance was calculated by subtracting 20% of the recipient's gross income from 30% of the payor's gross income, with a cap equalling 40% of the parties' combined income.
Under the new law, 25% of the recipient's net income is subtracted from 33.33% of the payor's net income to determine the amount of spousal maintenance. For more on how spousal maintenance and net income are calculated, check out our article: How to Calculate Illinois Spousal Maintenance.
So who benefits from the changes to 2019 spousal maintenance laws? 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 previous system, it made 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.