New Maintenance Calculations for 2019 in Illinois Post-Trump Tax Reform: Senate Bill 2289
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.
Proposal to Change Spousal Maintenance Calculations
Recognizing the difficulty of the new tax law that will take effect on January 1, 2019, Illinois lawmakers have changed the formula for spousal maintenance awards so that payor spouses pay less to payee spouses. The idea is that a decrease in spousal maintenance payments would account for the shift in taxation. These changes to the law are outlined in SB 2289.
How does the bill change the formula? Currently, the spousal maintenance formula says that the court will take 30 percent of the payor’s gross income and subtract 20 percent of the payee’s gross income to get the spousal maintenance payment. Under the new law, which will take effect January 1, 2019 (the same date as the TCJA changes to the taxation of spousal maintenance awards), courts will take 33 1/3 percent of the payor’s net income and subtract 25 percent of the payee’s net income to get the maintenance payment amount.
The governor approved the bill in August 2018, and to be clear, it will take effect concurrently with the TCJA shift in spousal maintenance taxation methods.
Learn More from an Oakbrook Terrace Divorce Lawyer
The talented DuPage County divorce attorneys at Farooqi & Husain Law Office have years of experience handling a wide variety of family law matters for members of the Muslim community in our area, and we can speak with you today about your case. Call us at 630-909-9114 to get started.