How the New Tax Plan Could Affect Alimony
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?
Currently, the party who pays spousal maintenance in Illinois is permitted to deduct all of those maintenance payments from their taxable income so that he or she is not paying taxes on it. For instance, if a party who pays spousal maintenance earns a gross monthly income of $6,000 but pays $1,000 in alimony, that $1,000 in alimony is deducted, and the working net income for tax purposes (without considering any other deductions) is $5,000. On the flip side, the party who receives spousal maintenance payments currently has to pay a 15 percent tax rates on the maintenance payments. In other words, those maintenance payments are treated as income.
Now, however, with the changes to U.S. tax law, the federal government will collectively receive more money from both parties. The party paying maintenance will not be deducting spousal maintenance from taxable income (and thus will be paying more in taxes), which ends up being more than the amount the spouse receiving the income would have paid as taxes on it. The changes to the law take effect on December 31, 2018. As such, any divorce proceeding commenced after that date will be bound by the new law.
Divorce Negotiations and Spousal Maintenance
These changes to the tax law could make divorce negotiations more difficult between parties and could lead to smaller amounts of spousal support as cash goes to taxes instead. Indeed, many family lawyers have underscored how the current system of taxing spousal maintenance — the system that is currently in place before the new law takes effect — has made settling divorce cases easier. Parties may be less willing to negotiate, or to pay spousal maintenance when the party paying it will not be able to deduct it from taxable income.
Contact an Oakbrook Terrace Divorce Lawyer
Do you have questions about how the new tax bill will affect your divorce case and spousal maintenance payments? An experienced DuPage County divorce attorney can help. Our lawyers have been serving members of the DuPage County Muslim community for years and can speak with you today. Contact Farooqi & Husain Law Office for more information.