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New Tax Law has Massive Impact on Illinois Divorces

On December 22, 2017, the President signed House Resolution 1, which amended the United States tax code in a number of ways. There are many aspects of the law which impact divorces or divorcing couples, but one that has an enormous impact on divorcing couples in Illinois.

Maintenance (formerly known as alimony) is money paid by a husband or a wife to a former spouse. The purpose of maintenance is because the receiving spouse is unable to provide for his or her support due to the circumstances of each case.

Since 2015, Illinois' maintenance law has been simplified to provide a formula for the determination of the amount and duration of maintenance once the Court has concluded that maintenance should be paid. As of January 1, 2018, that maintenance formula applies for divorce couples who have a combined income of less than $500,000 per year. The most basic explanation of maintenance formula is that the amount of maintenance is 30% of the payor's gross income less 20% of the payee's gross income.

As indicated in the paragraph above, maintenance is calculate using gross income meaning before deductions taxes or other deductions. This is because under the prior tax law, maintenance has been considered a taxable event. In other words, if you paid maintenance you were entitled to deduct that payment from your income, which reduced your taxes considerably. Likewise, people receiving maintenance had to declare the maintenance payments as income and pay taxes on those maintenance payments. The Illinois formula for determining maintenance, therefore, uses gross income for determining the amount.

The new tax law, however, changes the law regarding the taxation of maintenance payments. Under the new law, parties who get divorced on January 1, 2019, or later and pay maintenance will no longer be able to deduct maintenance payments from their income before paying taxes. Similarly, parties who receive maintenance payments from their former spouses will no longer have to pay taxes on those payments.

The combination of the Illinois law and the new tax law creates a huge and enormous issue for divorces occurring after January 1, 2019. This is because the Illinois law calculates maintenance payments assuming the payments are deductible to the payor and taxable to the receiver. Under the old tax law if you made a maintenance payment of $2500 most parties would save in the neighborhood of $500 in taxes, meaning the real cost of the maintenance was only $2000. Under the new tax law, however, the payor of maintenance loses the tax deduction meaning that maintenance is actually more costly.

This Illinois legislature could fix this problem by simply changing the calculation from using "gross" income to "net" income. As of the date of this article, however, there are no bills introduced in the Illinois legislature to correct this enormous problem.

What this means for you:

If you are thinking about a divorce and your spouse probably qualifies for maintenance (if you make significantly more money than your spouse and you have been married for at least five years) then this directly impacts you in a negative way. This means that you should start your divorce as soon as possible in order for it to be completed prior to 2019 when the tax law changes to eliminate the deduction for paying maintenance.

Every situation is different and it is important to obtain advice specific to your situation from a knowledgeable family law attorney. For more information about your specific situation you can contact me by email or phone at (312) 884-1529.

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