The amount of alimony (maintenance) a divorcing spouse should pay or receive is always a hot button issue during a divorce in Lake or Cook County.

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The Trump Tax Cut has thrown a wrench into maintenance calculations in Illinois. As of January 1, 2019, alimony will no longer be tax-deductible by the spouse making alimony (maintenance) payments. The person receiving maintenance will no longer declare those payments as taxable income.

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For decades, the alimony payers, who are generally in higher tax brackets, have been able to deduct the payments on their annual returns, while the recipients paid taxes on the income.

The new tax law will decrease the amount of money available for the split-up households because taxes will rise significantly for the spouse making the maintenance payments.

The spouse receiving the payments, meanwhile, could see a windfall under the new rules because the payments will no longer be taxable on Jan. 1.

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The stakes are high. It’s not unusual for high-end spouses to pay from $5,000 to $15,000 a month – or $60,000 to $180,000 a year in alimony. At look at how the tax law would treat annual payment of $100,000 in alimony is instructive.

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Let’s say the spouse paying the alimony earns $300,000 a year, and pays federal taxes of 35 percent on any income earned over $200,000. Under current law, he can deduct the $100,000 that he pays in alimony, which cuts his tax liability by $35,000.

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His wife would now pay taxes on the $100,000 in alimony, but at a lower rate, with her taxes coming to just $17,000. It's a way that federal tax law has softened the financial blow that divorce delivers when marriages dissolve.

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If you are looking to modify your current maintenance obligation or simply interested in obtaining more information regarding a divorce in Cook or Lake County Illinois, please call our top rated divorce law firm, DPG Family Law, and speak with one of our attorneys. We have been consistently ranked as one of the top divorce firms in the Chicagoland area. Please stop by our Lincolnshire or Hoffman Estates office for a free consultation.

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The Trump tax law eliminated the tax break, so the IRS will receive $35,000 in tax from the husband – and nothing from the wife. That means Uncle Sam ends up with $18,000 more. That’s $18,000 less in joint income that the partners get to split up in the divorce negotiations.

Last year, more than 586,000 taxpayers claimed deductions for nearly $12.7 billion in alimony paid during tax year 2016, according to the Internal Revenue Service.

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Under the 2017 Tax Cuts and Jobs Act, the alimony deduction will be grandfathered for the duration of existing divorce agreements, but it will be eliminated for new agreements beginning Tuesday. The change was intended to partly offset the budget deficits created by permanently lowering the corporate tax rate from 35 percent to 21 percent.

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Due to this change in tax laws, the Illinois legislator now must propagate a new maintenance calculation in order to account for the loss of deductions. The new maintenance law/formula will be as follows:

 

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.

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