Proposed Federal Tax Reform Could Directly Impact Divorce
The implications of divorce do not end when a marriage is formally dissolved. Parents must still interact with each other as they work to share custody in a manageable fashion. Moreover, the financial adjustments required as cash flow shifts to account for new expenses and reduced income are very necessary and long lasting.
A divorced individual’s tax liability is often directly impacted by divorce but frequently receives much less attention and consideration in the settlement process than this issue deserves. How property distribution and the method of disposition is structured, as well as support paid and received by each party, can produce serious tax consequences in the short- and long- term.
Spousal maintenance, or alimony, is an area that is particularly affected by the tax rules, and changes to the federal tax reform law are primed to directly influence how divorcing couples handle this already contentious issue.
Spousal Maintenance Generally
A spousal maintenance award is an aspect of divorce that requires a former spouse to pay support when the other party needs financial assistance to maintain a reasonable standard of living. This support is typically available, unless the parties mutually agree otherwise, when one spouse is at a financial disadvantage due to a long absence from the workforce or other obstacles that hinder a person’s ability to earn a sufficient amount.
If a Court is asked to decide the issue of maintenance, the Judge will first assess a long list of factors to determine if the support is appropriate. These factors generally relate to each party’s financial resources, earning capacities, contributions to the marriage, and standard of living enjoyed during the marriage. If decided that maintenance is appropriate, the Court will then decide whether to apply the statutory formulae that regulate the amount and duration of spousal maintenance for couples with combined gross yearly income up to $250,000.
However, a Court is not required to follow these guidelines, and may deviate, though the Judge must explain why. For couples who earn in excess of $250,000 per year, a Court is still given discretion to determine the amount and duration, which behooves the spouses to form their own agreement on this issue if possible.
Tax Code Changes and Negotiating Maintenance
Under the current law, the payor of maintenance is allowed to deduct the amount of this obligation from income, while the individual receiving support is required to include the amount received as taxable income. This rule offers benefits to both parties, as the paying spouse is typically in a higher income bracket, and incurs a net tax payment below the total amount, due to this deduction. Further, the party receiving maintenance is gaining more in actual dollars than the amount paid, resulting in supplemental support from the government.
However, a provision in the new tax reform bill eliminates all provisions related to maintenance payments in divorces issued after December 31, 2018, removing both the deduction allowances and the income reporting requirements. Removing the current tax benefits allotted to maintenance obligations is likely to aggravate the already difficult financial adjustment divorcing couples experience, and serves as a disincentive for the higher-earning spouse to agree to pay support. Consequently, this change in the law may lead to more highly-litigated divorces, which only harms the entire family as they try to cope.
Consult an Illinois Divorce Attorney
The financial impact of divorce cannot be overstated, so working with an experienced divorce attorney who knows the practical effects of this process is critical to making informed decisions about your future. Passionate Schaumburg family law attorney Nicholas Richardson understands the stresses of divorce, and will listen closely to your objectives so they can develop an effective strategy to meet them. To learn more, contact the law firm for a free initial consultation.