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The Magazine of Illinois Lawyers

March 2018Volume 106Number 3Page 18

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LawPulse

Decades-old maintenance deduction eliminated by new tax law

Beginning in 2019, payors will no longer be able to deduct maintenance payments from their federal taxes.

On December 22, 2017, President Trump signed the GOP's tax bill into law. While it has been lauded in some circles as a welcome tax break for American workers and businesses, changes to the tax code will make getting divorced more expensive for maintenance payors by removing a deduction in place since 1942.

Beginning on January 1, 2019, former spouses that pay maintenance will not be able to deduct the payments from their taxes. This change only applies to orders or settlements signed after January 1, 2019. Existing plans will not be disturbed.

Doing the math on higher costs for payors

ISBA Family Law Section members have been discussing the change in their ISBA Central community. (Find out more about ISBA Central at http://central.isba.org/.) One question on members' minds is whether legislation is being proposed to amend Illinois' recently changed maintenance statute to reflect the changes to federal tax law. According to Jim Covington, the ISBA's Director of Legislative Affairs, the ISBA and the Family Law Section Council are working on a proposal, the details of which are not yet available.

Family Law Section member David Gotzh of Chicago shared some simulated numbers for a middle-class family on ISBA Central. Based on his math, a hypothetical typical client who pays spousal maintenance could see a tax increase of $288 a month (or $3,456 annually). As he notes, that's a significant sum for working Americans.

Under the new tax law, not only will maintenance payors be unable to deduct the payments from their taxes, payees will not have to report the money as income. This will change the calculations under Illinois's new maintenance statute, which are based on the gross incomes of both spouses.

Prior to the GOP tax bill, the maintenance payment was considered part of the payee's gross income. Under the new tax law, the recipient spouse is not taxed on those funds. That means they are not calculated as part of the payee's reportable gross income. The hypothetical numbers provided by Gotzh reflect this change. His payor spouse will pay an extra $224 a month in taxes and $64 more a month in support - the latter amount the result of the payee's gross income decreasing under the new tax law.

Creative planning

ISBA Board of Governors and Family Law Section Council member Rory Weiler, founding partner of the St. Charles firm Weiler & Lengle, P.C., says that attorneys with pending cases should aim to complete them before December 31, 2018 - decrees and settlements executed before that date will not be affected by the new tax scheme. Lawyers will have to "get creative" and see how they can structure settlements to minimize the effects of the new bill, he says.

According to Weiler, the tax changes could result in an $8 billion windfall for the government. Working around the deduction issue may require clients to hire both attorneys and accountants, he says. Coming up with new strategies for minimizing financial impact on divorced spouses will be essential.

Relatively speaking, the changes will probably have the most impact on lower-income couples. While both low-income and high-income individuals will lose the tax deduction for their maintenance payments, those with higher incomes are better-positioned to absorb the higher tax burden.

Some members of the family law section ISBA Central community have wondered aloud whether the new tax law will create a basis for modifying existing support orders because the shift in tax burden amounts to a substantial change in circumstances.

Highland Park attorney Nancy Chausow Shafer noted that since the tax changes don't affect maintenance orders signed before January 1, 2019, there won't be a change in circumstances to warrant adjusting existing maintenance orders.


Matthew Hector
Matthew Hector is a senior associate at Woerthwein & Miller.

Member Comments (1)

This original version of this article referred to the 2025 expiration of the elimination of the maintenance deduction. In fact, the elimination of the deduction is not set to expire. We regret the error and have removed those references.