How the New Tax Laws Could Complicate Your Illinois Divorce

 Posted on March 14, 2018 in Spousal Maintenance

Taxes, though not often discussed, are a critical element in almost every divorce, and they are especially important when alimony may be owed. Thanks to the new Tax Code and Jobs Act, everything about alimony and taxes will change, come the start of 2019. Find out how and discover what it could mean for your Illinois divorce in the following sections. 

The New Tax Law and Divorce - An Overview

While the new tax law may not affect all divorces, it is likely to have a significant impact on cases involving alimony. Parties who pay support and complete their divorce after December 31, 2018, will no longer receive a tax deduction at the end of the year, and receiving spouses will no longer be required to pay taxes on the alimony they receive. At first glance, this might seem like a benefit for the family, but appearances can be deceiving. 

Taking Money Away from Families

Since paying spouses will no longer be permitted a deduction on their taxes, they may fall into a higher tax bracket, which may render them either unwilling or unable to pay as much alimony as they would have under the old law. Though the receiving spouse no longer has to pay taxes on their alimony, the tax load they carry is typically smaller than the paying spouse’s, so the purported “benefit” may actually be the family’s downfall.

As an example, consider the spouse that falls in the highest tax bracket with an income of $500,000 per year. With the tax deduction, they could potentially pay as much as $100,000 in support and it would only cost them $50,000. The receiving spouse, though required to pay taxes on the support, would still be left with $75,000. Under the new law, the paying spouse does not receive a tax credit, so they may only be able to afford $50,000 in alimony each year (what they would have paid, with the deduction). Though the receiving spouse is no longer required to pay taxes, they are still only left with $50,000, or $25,000 less than they would have had, even after paying taxes. In short, the new tax law takes money away from families, and it could put receiving spouses at risk for divorce-induced poverty. 

Improving the Outcome of Your Illinois Divorce

Thanks to the new tax law and the advance knowledge of its potential impact on divorcing spouses, parties may attempt to either speed up or slow down proceedings. Those that must pay support may want to complete their divorce before the new law takes effect so they can still claim the deduction on their taxes. Parties that receive support may want to stall proceedings so they can avoid paying taxes, but they may not understand the full implications of their actions. 

With these competing interests, it can seem almost impossible to move forward with a successful divorce negotiation (which is more cost-intensive than litigation). Thankfully, an experienced divorce attorney can help to mitigate the risks in your Illinois divorce by ensuring your rights are protected, and that you are fully informed of your rights and options every step of the way. 

Contact Davi Law Group, LLC, where your best interests are a top priority. Dedicated and experienced, our DuPage County divorce lawyers provide attentive and comprehensive services to suit your needs. Call 630-580-6373 and schedule your personalized consultation today. 

Source:

https://www.nbcnews.com/business/business-news/new-tax-laws-will-likely-make-getting-divorce-even-worse-n849946

https://www.cnbc.com/2018/02/16/loss-of-alimony-tax-break-in-tax-law-may-inflame-divorce-negotiations.html