Both federal and Illinois state law made dramatic changes to maintenance, also known as alimony or spousal support, that go into effect on January 1, 2019. This article summarizes the major changes, and provides two examples applying the changes to the law.
First are the changes to federal income tax law about maintenance. If a divorce is finalized before the end of 2018, then all future maintenance payments made pursuant to the divorce judgment should be considered taxable income to the recipient. Those maintenance payments are also considered an “above-the-line” deduction from the payor’s taxable income when figuring adjusted gross income. For divorces where the judgment is entered after 2018, federal income tax law removes the tax consequences of maintenance. In other words, maintenance in divorces finalized in or after 2019 will not be taxable income to the recipient and will not be tax deductible by the payor. The above law was signed at the end of 2017, but was given a year to take full effect.
Because of the changes to federal law about maintenance, Illinois subsequent changed state laws to calculate maintenance. For a divorce finalized in 2018, the statutory guidelines provide for calculating maintenance at 30% of the payor’s gross income, minus 20% of the recipient’s gross income. For divorces finalized after 2018, the formula to calculate the statutory guideline amount of maintenance changes to one-third of the payor’s net income, minus one-fourth of the recipient’s net income. The child support statute is used to calculate net income for maintenance purposes.
The new Illinois statutory guidelines keeps intact the maximum cap on the amount of maintenance. That cap is 40% of both spouse’s combined gross incomes, minus the recipient’s gross income.
Below are two examples of maintenance in Illinois divorces, comparing and contrasting what happens in each if they finish in 2018 or afterward. In the first example, the payor grosses $90,000 annually and the recipient grosses $20,000. If this divorce is finalized in 2018, the maintenance amount will be:
30% of payor’s gross annual income
– 20% of recipient’s gross annual income
= Annual maintenance, before 40% cap
= Monthly maintenance, before 40% cap
($90,000 x 30%) ($20,000 x 20%)
$27,000 -$4,000 $23,000 $1,917
If the divorce in the first example is finalized in 2019, the estimated maintenance amount will be:
33.33% of payor’s net annual income – 25% of recipient’s net annual income
= Annual maintenance, before 40% cap
= Monthly maintenance, before 40% cap
($65,300 x 33.33%) ($17,200 x 25%)
$21,767 -$4,300 $17,467 $1,456
We also must compute the 40% cap, which is:
Both spouses’ combined gross annual incomes ($90,000 + $20,000) $111,000
x 40% cap
= Cap on annual maintenance + recipient’s income – Recipient’s gross annual income
= Maximum annual maintenance after considering 40% cap
= Maximum monthly maintenance after considering 40% cap
In the first example, the maintenance under the current and new law is below the 40% cap. The gross maintenance amounts are lower ($461 monthly, $5,533 annually) if the divorce is finalized in 2019 instead of this year. However, the lower maintenance amount would not be tax-deductible by the payor or taxable income to the recipient.
For the second example, the payor grosses $113,000 annual and the recipient grosses $24,000. If this divorce is finalized in 2018, the maintenance amount will be:
30% of payor’s gross annual income
– 20% of recipient’s gross annual income
= Annual maintenance, before 40% cap
= Monthly maintenance, before 40% cap
($113,000 x 30%) ($24,000 x 20%)
$33,900 -$4,800 $29,100 $2,425
Under the law that goes into effect after 2018, the estimated maintenance amount for the second example would be:
33.33% of payor’s net annual income – 25% of recipient’s net annual income
= Annual maintenance, before 40% cap
= Monthly maintenance, before 40% cap
($81,000 x 33.33%) ($19,000 x 25%)
$27,000 -$4,750 $22,250 $1,854
$137,000 x 0.40 $54,800 -$24,000 $30,800
Again we also compute the 40% cap, which is:
Payor’s and recipient’s combined gross annual incomes ($113,000 + $24,000)
x 40% cap
= Cap on annual maintenance
– Recipient’s gross annual income
= Maximum annual maintenance after considering 40% cap
In the second example, the anticipated maintenance under the current law or the new law is below the 40% cap. The amounts under the new law are lower ($571 monthly, $6,850 annually) than under the current law. However, the lower maintenance amount under the new law has no income tax benefit to the payor and no tax consequence to the recipient.
Persons going through a divorce in which maintenance is likely or probable should consult an accountant or tax advisor about the advantages and disadvantages of finalizing the divorce in 2018, and compare and contrast to finalizing the divorce next year. Paying lower maintenance without income tax consequences may be the same, better, or worse than paying a higher amount that does have income tax consequences.