Over the last few years, Illinois lawmakers have made sweeping changes to domestic relations law. Those changes include a new method for calculating child support, new definitions of parental roles and responsibilities, and new guidelines for divorced parents seeking to relocate with their children. This year, the most significant change to family law in Illinois involves maintenance, formerly known as “alimony” or “spousal support”. In keeping with changes to federal tax law governing maintenance enacted in 2017, Illinois has made maintenance “tax free” by eliminating the previously-mandated deductions and obligations. This new law will have major tax implications for those initiating or finalizing a divorce involving maintenance in or after 2019. If you are divorced, or are going through the process of divorce, it is important to know about these changes in order to understand if they will impact your maintenance payment and how that could affect your finances overall.
What Changed? Why?
The Illinois legislature’s changes to existing Illinois maintenance laws under Section 504 of the Illinois Marriage and Dissolution of Marriage Act (IMDMA) were in direct response to major changes in federal tax laws governing maintenance in 2017. When the federal government enacted the Tax Cuts and Jobs Act (TCJA), maintenance payments became “tax free” by eliminating tax deductions for the person paying maintenance (the “payor”) and removing declaration obligations for the person receiving maintenance (the “payee”). Consequently, the tax burden flipped from the payee to the payer. As of January 1, 2019, the State of Illinois began applying those tax burdens, and breaks, in accordance with the federal law.
When considering the potential impact of this new law, it is important to remember that maintenance is normally only granted when one person in the marriage or civil union earns significantly more than the other. Maintenance is not a given in every divorce, but rather is granted by the judge after consideration of several statutory factors involving the parties’ financial situation during the marriage. In fact, maintenance is usually ordered only when there is a significant disparity between incomes that could leave the receiving party in bad shape financially if they were to lose all monetary support from their former spouse. It is important to note that the updated statute continues to protect the payor by mandating that maintenance payments cannot exceed forty (40) percent of the parties’ combined incomes.
In recognition of the disparity between incomes, and in an effort to generate more tax revenue, the TCJA assigns the tax burden to the higher-earning payor instead of the payee. This decision is in keeping with the idea that because the payor is the higher earner they can afford to pay more in taxes. By eliminating the tax deductions for maintenance previously allocated to the payor, the payor will have a greater tax burden that could move them into a higher tax bracket. Likewise, eliminating the obligation that the payee pays taxes on maintenance received will likely move them into a lower tax bracket. The result is a significant savings for the payee, and a significantly higher tax burden for the payor.
Who is Impacted?
It is critical to note that under the TCJA and new Illinois laws, these changes only impact individuals ordered to make maintenance payments on or after January 1, 2019. Anyone ordered to pay maintenance prior to 2019 will not lose their tax deduction. Likewise, recipients of maintenance under a court order issued prior on or before December 31, 2018 still has to declare maintenance as income and will continue to pay taxes on any maintenance received.
However, for anyone whose divorce is finalized in or after 2019, the new law will govern any tax burdens or benefits related to their maintenance payments. Individuals who filed for divorce prior to 2019 will not have the benefit, or obligation, of the previous tax laws if maintenance payments were not ordered until 2019 or after.
Additional Changes to Know About
In addition to the changes to the tax implications for the parties, it is important to note that the legislature also enacted other changes that impact who can receive maintenance and how it is calculated.
First, the new law included that individuals in a civil union are also entitled to maintenance, meaning that maintenance is no longer restricted just to married couples.
Second, the legislature has enacted significant changes to the formula used to calculate alimony. Previously, alimony was calculated by taking thirty (30) percent of the payor’s gross income and subtracting twenty (20) percent of the payee’s gross income. “Gross” income is defined as an individual’s total income before taxes and other mandated deductions. Now, alimony payments are calculated by thirty-three (33) percent of the payor’s net income and subtracting twenty-five (25%) percent of the Payee’s net income. “Net” income is defined as an individual’s total income after taxes and other mandated withholdings. How this change from gross to net income, and the increase in the percentages, impacts the amount of a maintenance payment will depend on the parties’ individual incomes.
As with child support, net income is calculated using a standardized tax amount rather than an individual’s actual tax amount. Individuals wishing to use their own personal tax amount must either seek an agreement to that effect with the other party or petition the court for the use of an individualized amount instead of the guidelines.
Can I Take My Case Back to Court?
Given the changes in federal and Illinois tax law regarding maintenance payments, and the new formula used to calculate maintenance payments, recipients of alimony may be curious as to whether they can take advantage of the tax breaks available to recipients of maintenance by seeking a modification to their current maintenance agreement.
The new statute explicitly states that an individual cannot seek a modification to a maintenance order granted prior to January 1, 2019 solely on the basis of the new tax laws. Additionally, any maintenance order that is modified during or after 2019 will continue to be taxed according to the year the original order was entered. The only way to apply the new tax laws to an old maintenance order is if the parties agreed that the maintenance payment was modifiable in their original agreement or the parties agree to a modification to apply the current tax laws to their maintenance payments.
Consequently, anyone wishing to relieve their tax burden by eliminating the requirement that they declare their maintenance payments as income is, unfortunately, out of luck. Likewise, those who entitled to the tax deductions authorized under the previous law will continue to reap that benefit.
Will These Changes to Maintenance Impact My Child Support Payment?
If children were born during the marriage, the person paying maintenance is also likely to be making child support payments. It is important to know that the new tax laws regarding maintenance should not impact the amount of child support payments. The new laws were written only to change how maintenance is taxed and calculated. Under the current law, child support is a calculation and obligation almost entirely separate from maintenance.
However, the statute also includes new language that the total amount paid in maintenance and child support cannot exceed fifty (50) percent of the payer’s net income. If that occurs, the judge has discretion to depart from the statutory guidelines in order to reduce the payment amounts to an equitable amount to avoid penalizing the payor.
Chicago Family Law Group, LLC has successfully helped many people on both sides of the issue of maintenance. If you are planning to get divorced and would like to know more about possible maintenance obligations or benefits, we can answer your questions and provide you with the assistance you need.
Call us today at (312) 893-5888 to discuss your case with one of our attorneys and find out how we can help you.