Maintenance Tax Deduction Going Away

While many property owners in Illinois flooded to their assessor’s office to prepay their property tax bills due to the expected reduction of the property tax deduction on their Federal tax returns, the recent tax reform act enacted by Congress and signed by President Trump also contains a significant change to family law matters. Maintenance or alimony payments that were once deductible by the payor on his/her taxes and claimed by the payee on his/her taxes will no longer treated in the same way. Since this new provision will not go into effect until January 1, 2019, there is still time to plan if this change will affect your situation.

For those that already have a maintenance obligation ordered by the courts through a Judgment for Dissolution of Marriage entered prior to the new law, this change will not impact you as it is not applied retroactively. For any divorce or separation agreements signed after December 31, 2018, however, the change may have drastic effects on the settlement or resolution of your divorce case.

The tax deductibility of maintenance is a benefit to both parties as the net result is that more money kept from the government. This is true because the recipient of maintenance is normally at a lower tax bracket resulting in lower tax payments on that income. Depending upon the circumstances, the payor may actually drop into a lower tax bracket as well if the deduction is significant enough.

When the new maintenance formula was established several years ago, it was done under the understanding maintenance would generally be tax deductible by the payor and taxable to the payee. With the change in the tax law, the State Legislature may feel the need to revisit the formula for maintenance. The Legislature may also simply decide to keep the formula as is even though one of the assumptions under which it was established is no longer valid. We will have to wait and see.

The change in the tax laws may also impact other issues related to divorce – most notably, child support. Currently, child support is determined according to child support tables created by the Illinois Department of Healthcare and Family Services. When the maintenance laws were changed several years ago, the guideline amounts for child support were based on the net incomes of the parties, after taxes. Net income was determined, in part, on the tax deductibility of maintenance. Whether the State Legislature will change the formula again because of the change in the tax law is another matter that remains to be seen.

One final and critical matter to keep in mind with this tax law change is the date it becomes effective, January 1, 2019. Many obligors will be pushing to have the cases resolved and settled by December 31, 2018, so they are able to claim the tax deductibility of the maintenance they will have to pay. Recipients of maintenance, on the other hand, may try to push for a resolution after January 1, 2019, in order to avoid having to pay income taxes on their maintenance payments.

If maintenance is an issue in your divorce case, please contact us to consult with you regarding how these tax reform laws will impact your case. We can use the latest software to properly, accurately and efficiently calculate your potential support obligations so you can prepare for your financial life after the divorce or legal separation.