Beginning on January 1, 2019, the way that spousal maintenance payments are taxed under federal law will change. This change is likely to have a significant financial impact for divorcing couples in Chicago and throughout the state of Illinois. Recognizing that the changes to the federal tax law under the Tax Cuts and Jobs Act (TCJA) will change the way that couples in Illinois are planning for divorce in terms of the financial effect, the state legislature amended the Illinois Marriage and Dissolution of Marriage Act (IMDMA) so that the decision to award spousal maintenance (also known as alimony), as well as the formula for calculating the award take into account the federal tax law changes.
According to an article in the Chicago Tribune about the state law changes, the bill that amended the IMDMA—Senate Bill 2289—was signed into law in August and will take effect on January 1, 2019. We will remind you about how the TCJA will affect spousal maintenance payments in the New Year, and then we will explain how the Illinois state law changes are designed to offset the federal tax law shift.
One part of the TCJA will only affect couples that finalize their divorces on or after January 1, 2019. In other words, for people whose divorces are final at any point in 2018 or earlier, the old model for calculating tax on spousal maintenance payments will remain in effect. To be clear, even in 2019 and afterward, federal taxes for those who pay and receive alimony, and for whom their divorces were finalized before 2019, will continue to use the old formula for taxation into 2019. But those who get divorced in 2019 and after will be required to use the new taxation method.
The old method is this: The party paying alimony gets to deduct the alimony payment from his or her income before calculating taxes, meaning that the spouse paying alimony does not pay taxes on that money. Instead, the receiving spouse pays alimony on the money she or he receives as if it were income. In the New Year, the party paying alimony will not be able to deduct those payments any longer and will be required to pay taxes on that income. Then, the party receiving the maintenance payment will not have to pay taxes on that money. The reason for the change is that the paying spouse earns more than the receiving spouse, and as such the paying spouse would have to pay more taxes on that spousal maintenance money based on his or her income.
Under the IMDMA, beginning on January 1, 2019, changes to Illinois law, made in response to the federal tax law changes, will take effect. First, when a party requests spousal maintenance, the court “shall consider the tax consequences to each party” concerning spousal maintenance instead of—as before—considering the tax consequences of property division on each party. In other words, the court can make a decision about whether spousal maintenance is appropriate based in part on the tax implications for each party.
In addition, the guidelines for calculating maintenance will change. Beginning in the New Year, maintenance calculations will work like this:
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