New Income Tax Reform Act

 Posted on December 21, 2017 in Family Law

NO MORE MAINTENANCE DEDUCTION FOR JUDGMENTS OF DISSOLUTION OF MARRIAGE ENTERED AFTER JANUARY 1, 2019.

As of December 21, 2017, here is how things stand:

*The House of Representatives, voting along party lines (227-203), approved the biggest re-write of the Income Tax laws since 1986.

*The Senate passed a final vote on December 19, 2019, and the House voted a second time to pass the bill on December 20. The President is expected to sign the bill into law within the next few days.

What does the New Income Tax Reform Act mean to Illinois Families going through Divorce?

Maintenance payments to your ex-spouse will no longer be income tax deductible by you or income taxable to the receiving ex-spouse when the new GOP Income Tax Law takes effect January 1, 2019.

UNDER THE CURRENT LAW:

Historically, upon divorce, one spouse (usually the Husband) was paying alimony (maintenance) to the Wife, his now ex-spouse. Those maintenance payments by IRS law have been income tax deductible to the Husband as the paying spouse and income taxable to Wife as the receiving spouse. That is all about to change.

Under the New Republican Tax Act, the maintenance deduction would be eliminated for maintenance payments for all Judgments for Dissolution of Marriage (divorces) entered by Illinois divorce Judges on January 1, 2019, and thereafter.

Illinois Husbands have frequently been more willing to pay maintenance to their ex-wives in order to obtain the maintenance deduction. In fact, in cases where the Husband also had to pay child support to the Wife, the child support was not income tax deductible. From the Husband's point of view, he would have preferred combining the maintenance and child support into what is known as "unallocated family support" so that both maintenance and child support would then be completely income tax deductible to the Husband.

Why would the Wife ever accept "unallocated family support" combining both maintenance and child support since she would have to pay income taxes on the total amount?

The short answer: the "unallocated family support" was negotiated to a higher amount so that her unallocated family support was more money and after taking into account her additional income taxes. In sum: she received more money each month even after income taxes.

Under the House Republican Tax Act, the deduction for maintenance payments would be completely eliminated and so would "Unallocated Family Support."

UNDER THE NEW LAW

HOW WILL THE NEW LAW AFFECT YOU

So, no more income tax deduction for the Husband for maintenance. Thus, less incentive for him to pay higher maintenance to the Wife.

Also, no more combining maintenance and child support to provide the Wife "unallocated family support" with greater after-tax income to the Wife and an income tax deduction by the Husband of both maintenance and child support when they are combined.

Some say that an Illinois Wife receiving maintenance after the Republican Tax Act takes effect January 1, 2019, will actually be worse off. The ex-wife will receive less maintenance after taxes, as the amount of maintenance will remain as calculated under the Illinois Marriage and Dissolution of Marriage Act, assuming Illinois moves to a net income model. (Illinois presently has a gross income model that is used to calculate maintenance.) More to come on this.

OTHER THINGS TO CONSIDER

PRE-NUPTIAL AND POST NUPTIAL AGREEMENTS

Many Illinois Couples have Pre-Nuptial and Post-Nuptial Agreements. Those agreements frequently provide for income tax deductible maintenance payments by the ex-Husband. Those Pre-Nuptial and Post Nuptial Agreements were created based upon the assumption that maintenance would remain income tax deductible. Those Pre-Nuptial Agreements and Post-Nuptial Agreements may need now to be redrafted or amended to account for the change brought about by the New Tax Act. So, make sure that if you have such an agreement, you read it thoroughly and consult with a divorce lawyer to redraft or amend your prenuptial or postnuptial agreement.

TIMING YOUR ILLINOIS DIVORCE

Since the New Tax Act does not take effect until January 1, 2019, if you are a Husband (or the paying spouse) going through an Illinois divorce, you should consider getting your Illinois divorce over with before that date so that your Judgment for Dissolution of Marriage will be under the old rules, and maintenance will be income tax deductible for you in the years to come. If you are a Wife with children and are eligible to receive maintenance and child support, you are still eligible to receive "unallocated family support" by an Agreement with your soon to be ex-Husband. Now might be a good time to negotiate that and unallocated support.

IF THERE IS A JANUARY 1, 2019 DEADLINE, YOU MAY ASK HOW LONG WILL MY ILLINOIS DIVORCE TAKE?

How long will my Illinois divorce take? It may well depend upon the Illinois County where your divorce is filed. Cook County has a reputation of the longest divorces in Illinois. Other Illinois counties vary in the length of time it takes to get a divorce. If timing is important to you, you should consult with your divorce lawyer. You may even consider moving to another Illinois County where the divorce goes more quickly to take advantage of the timing of your Illinois divorce.

If you are about to start an Illinois divorce or are thinking about a divorce in the near future, contact our lawyers at Martoccio & Martoccio and schedule your free initial consultation. Contact our office at 630-920-8855 today.