At the start of 2019, the federal government eliminated the 70-year-old tax deduction associated with alimony payments. For receiving spouses, it may seem beneficial to no longer have to claim alimony payments as income, but the change actually leaves less money for the entire family. That is because paying spouses, who remain at the same tax bracket, may need to decrease their support amount to balance out their financial obligations. Thankfully, there are some alternative strategies that families can use to preserve their wealth after a divorce. 

Trading Alimony Payments for a Transference of Retirement Funds 

Depending on the ages of the divorcing parties, a transference of retirement funds may be preferable to alimony payments. In this option, the paying spouse makes a tax-free exchange of money by directing some of their retirement funds to the lower-earning spouse. The receiving spouse may also withdraw from the amount without tax penalty, so long as they are age 59.5 or older. If the receiving party has not yet surpassed the age threshold, divorcing parties may want to consider another alternative, as the 10 percent early withdrawal penalty may outweigh any potential benefits for the family unit. 

Using a Trust Account in Lieu of Alimony Payments 

Another potentially viable alternative to alimony payments is the use of a trust account. The most commonly used versions are the CRT (charitable remainder trust), QTIP (Qualified Terminable Interest Trust), ILIT (Life Insurance Trust), and Alimony Trusts. 

New tax laws that went into effect for this year have brought about quite a few changes. One major change, which could be bad news for those who are currently in the process of divorce, is that alimony (known as spousal maintenance under Illinois law) is no longer tax-deductible for those who pay it, and it will not be considered taxable income for those who receive it. This may be a major loss for people who are required to pay a large amount of alimony.

The 2018 Tax Cuts and Jobs Act (TCJA) is in effect now, and it applies to any divorce cases finalized after December 31, 2018. Therefore, going forward, any divorce that includes spousal maintenance will follow the new rules. Pre-2019 divorcees, however, may still qualify for the old rules.

Payors: Does Your Pre-2019 Agreement Meet Requirements for Tax-Deductible Alimony?

Many factors go into determining whether you can still deduct your spousal support payments from your taxes, including, but not limited to the following: 

Alimony, otherwise known as spousal maintenance, is not routinely awarded in Illinois. However, it is an element in some divorce cases. Learn how determinations regarding alimony are made, including how long you can expect to receive payments, and discover how a seasoned divorce lawyer can help you pursue the most favorable outcome in your case. 

Illinois’ Statutory Guidelines on Alimony 

Most of the time, family courts use a set of statutory guidelines to determine the amount and duration of alimony payments. While the court may deviate from these rules, they must either provide a valid reason for doing so, or the combined annual income of the parties must amount to more than $500,000. In those instances, the court may weigh several factors to determine the amount and duration of alimony payments (i.e. the length of the marriage, contributions of each party to the marital estate, ability to work, education, etc.). Otherwise, an alimony award is usually determined using a two-step process. 

• The amount of alimony to be paid each year is determined by subtracting 20 percent of the receiving spouse’s gross income from 30 percent of the paying party’s gross income. 
• The duration that alimony should be paid is determined by multiplying the years of marriage by a specific percentage (based on the number of years the parties were married). The product of the equation is the number of years that alimony will be paid. 

In 2018, the courts changed the multiplying factors used to determine the duration of spousal support, which has resulted in some parties receiving alimony for a shorter amount of time. These new percentages are as follows: 

Money is often one of the leading sources of contention during a divorce, and it is about to get worse, thanks to the new tax law regarding alimony payments. Set to take effect on January 1, 2019, this new law will eliminate the tax credit that paying parties used to receive at the end of the year. Learn what this could mean for your Illinois divorce, and discover how a seasoned divorce lawyer may be able to help you mitigate the potential risks and issues that could arise. 

A Closer Look at the New Alimony Tax Law

In previous divorces, and those completed before January 1, 2019, alimony payers receive a tax credit at the end of each tax year. The receiving party is also required to report their alimony payments as income to the Internal Revenue Service (IRS). Both of these aspects of divorce will be changing at the beginning of next year. That means there will no longer be an incentive for paying alimony, and fewer parties will be willing to pay it. That can hinder the financial well-being of receiving parties, as well as the paying parties, perhaps even more so than many realize. It can also make for more contentious divorces, and that can increase the stress levels of all involved parties - especially any minor children that the couple may share. 

Alimony, though awarded less frequently today than it once was, is still a component in some divorces. Thanks to the changing tax laws under the Tax Code and Jobs Act, the rules that once applied will be changing as well. More specifically, parties who pay alimony will not be eligible for a tax deduction if their divorce is finalized after December 31, 2018. Learn more about how this new law may impact your post-divorce finances and discover some strategies for minimizing the damage in the following sections. 

Alimony Under the New Tax Law

The new tax law removes the deduction that alimony paying spouse once received. Sadly, this can keep them in a higher tax bracket, which may ultimately impact the amount of alimony that they are willing to pay. The receiving spouse, though no longer required to pay taxes on their alimony money, may receive a lower award, thanks to their spouse’s tax bracket stance. The new tax law may also hinder negotiations, making for a longer, more drawn-out divorce, which also drives up the cost of divorce. In short, the new law could have a significant impact on the finances of all involved parties, both during and long after the divorce.