As you may know, the Tax Cuts and Jobs Act (TCJA)—better known as Trump tax reform—will change the way in which spousal maintenance affects taxes. In short, after the new year, the spouse making alimony payments will have to pay more money in taxes, while the spouse receiving alimony payments will have to pay less in taxes. However, a new Illinois law considers these federal tax law changes and makes it so that the spouse making payments is not as adversely affected as she or he otherwise might have been. We will say more about how spousal maintenance is taxed, and then we will talk about the calculations for spousal maintenance after 2019 when both laws (federal and state) will take effect.

How Spousal Maintenance and Taxation Currently Works

Currently, under Illinois law (750 ILCS 5/504), here is how taxation works when it comes to spousal maintenance: the spouse who makes alimony payments (the payor) can deduct the spousal maintenance payments from his or her income prior to paying taxes, while the spouse who receives alimony payments (the payee) must pay taxes on the spousal maintenance payments in the same way that the spouse would pay taxes on other types of “income.”

However, under the TCJA, the new federal tax law, any divorce that is finalized on or after January 1, 2019 will see a major change when it comes to taxing spousal maintenance. For these divorces, the payor spouse will be required to pay taxes on spousal maintenance payments while the payee spouse no longer will have to pay taxes on spousal maintenance payments received. What is the effect of this? In brief, the payor spouse ends up paying more in the long run, while the payee spouse retains more money and pays less in taxes in the long run. Since the payor spouse earns more money than the payee spouse, the payor spouse’s income typically is taxed at a higher rate. As such, taxing the spousal maintenance payments on the payor’s end in most cases will mean that the taxes are higher and the federal government receives more from that payment in taxes.

Getting divorced can take a significant financial toll on any couple or family, especially when just one of the spouses was the primary earner. Whether one spouse stayed at home during the marriage to raise children or simply had a lower earning job, divorce can be extremely difficult when parties begin living on only one income. Alimony, which is known as spousal maintenance under Illinois law, is a term to describe a maintenance payment from one spouse to the other in order to account for substantial differences in income levels as a result of the divorce. Spousal maintenance is not awarded in all divorces, but it is awarded in many of them.

Factors for Awarding Spousal Maintenance in Illinois

In order for one spouse to receive alimony or spousal maintenance from the other spouse, the spouse seeking the maintenance must request it. The first step the court takes when it receives a request for spousal maintenance is to determine whether it is appropriate. In other words, should the spouse who wants maintenance receive it?

If you are currently paying alimony in Oakbrook Terrace  (or “spousal maintenance,” as it is known under Illinois law), or if you are planning to file for divorce in 2018, it is important to think carefully about how the new tax plan could affect alimony payments. In short, the Tax Cuts and Jobs Act of 2017 will change the way your spousal maintenance payments — whether you pay them or receive them — affect your total taxable income and thus the amount of tax you pay. To be sure, Trump’s tax bill will make 2018 an interesting year for those looking to divorce. What does this mean for Illinois residents, and is there anything you need to do before the tax plan takes effect?

Alimony, Tax Deductions, and Taxable Income

The new tax bill comes with big tax cuts for certain individuals and entities. In order to raise revenue that will be lost through the tax cuts, the Republicans who drafted the bill turned to alimony as a possible source of revenue. Under the new bill, spousal support paid by one spouse to the other will not be tax deductible, and the recipient spouse no longer has to pay taxes on it. How is this different from the current system?