2019 Federal Tax Law Changes and Its Impact on Divorce

Wheaton Divorce Attorneys Explain Tax Changes

At Goostree Law Group, our experienced family law attorneys have been helping clients in and around DuPage County with their most challenging divorce-related concerns for over 15 years. We can assist you with all aspects of the divorce process, including the division of marital property, spousal support, child custody (parental responsibilities), and child support. Our team is also equipped to help you understand how your divorce will affect your tax liabilities.

Tax laws are constantly being updated, and when they change, the resulting impact on individuals and families can be substantial. In 2017, federal lawmakers passed a tax reform plan which affected people who finalizes their divorce on or after January 1, 2019. The reform measure is expected to have a dramatic impact on divorce proceedings around the country—perhaps more so than any other tax law change in recent memory.

Spousal Support and Taxes

In the 1940s, the Internal Revenue Service created rules that allowed alimony payments—known as maintenance in Illinois—to be tax-deductible for the spouse making payments. The recipient spouse was responsible for paying taxes on any maintenance payments that he or she received. This tax system allowed for an overall tax savings and more available money for the divorced couple.

As of January 1, 2019, however, maintenance payments are no longer tax-deductible, nor are they taxable to the receiving party. The paying party must pay taxes on his or her income before it is used to make the payments. While the tax burden is technically lower on the receiving spouse, the total amount of taxes that must be paid will generally be greater than it would have been under the old system. Thus, higher-earning spouses are more likely to fight for lower maintenance payments, to the potential detriment of lower-earning spouses.

An Illustrative Example

Consider a case where a divorced man earns $400,000 per year. (These numbers will be over-simplified to make them easier to understand.) Assume that he pays the federal tax rate of 35 percent on the income he earns above $200,000. During his divorce, the man was ordered to pay $125,000 in maintenance to his ex-wife.

When the $125,000 was tax-deductible, the man's tax bill dropped by more than $43,000. His ex-wife paid taxes on the $125,000, but at a lower rate due to her lower income. She paid only about $21,000 in taxes on the maintenance that she received.

Under the new law, however, the man would be required to pay taxes on all of his income before he makes the payments to his ex-spouse. As a result, the money being paid as maintenance would be taxed at the higher rate because of the man's higher income. With maintenance no longer deductible, his tax bill for the portion of his income paid as maintenance would be $43,000. This scenario would leave the man and woman with about $22,000 less than they would have available under the previous system. The $22,000 will go directly to the federal government.

What Does This Mean for Divorcing Couples in Illinois?

The new tax law places a much greater financial burden on the higher-earning spouse. In the example above, the man is now responsible for not only the $125,000 in maintenance but also for $43,000 more in taxes. Virtually anyone in such a situation would be inclined to fight to reduce their liabilities. Financial and family law experts believe that the new law will lead to a decline in maintenance payments—a reality that will disproportionately hurt lower-earning spouses. They also point out that lower-earning spouses are usually women.

At Goostree Law Group, we understand that the new tax law may present serious challenges during your divorce. Whether you are a higher-earning spouse being asked to pay more or a lower-earning spouse who needs maintenance to make ends meet, our lawyers will work hard to protect your rights and your future.

Call 630-364-4046 Today

To learn more about the tax law changes for 2019 and how they might affect your divorce, contact our office. Call 630-364-4046 for a free consultation today. We serve clients in Wheaton, Downers Grove, Lisle, Aurora, Warrenville, Woodridge, and DuPage County.