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. 

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. 

Child support and spousal maintenance are two of many considerations in an Illinois divorce, and the financial obligations included in a final decree will vary based upon the unique circumstances of the parties involved. When a divorcing couple can agree to certain support issues, there are tax benefits that the couple can take advantage of by structuring payments in a certain way. An arrangement termed “unallocated” child support is attractive to both parties. Speak with an Illinois divorce attorney with experience in tax matters to see if it is an option for you.

Default Rules on Spousal and Child Support

Spousal support, commonly termed alimony, is paid by the spouse in a higher income bracket to the individual with a lower income; the intent behind spousal support is to ensure that person enjoys a similar lifestyle after the divorce as compared to when the couple shared a household. Under federal law, the payor spouse can deduct alimony payments when filing individual income tax returns. However, child support falls under a different set of tax laws and is not deductible from the payor parent’s income taxes.