Before 2019, maintenance (formerly known as alimony) worked much differently in Illinois. Over time, laws change and people’s circumstances change.
But, when considering whether to file a motion to modify maintenance, there are some important tax considerations that should be understood.
Illinois’ Old Maintenance Law Vs. Illinois’ New Maintenance Law
Illinois used to calculate maintenance in a variety of ways.
Prior to 2015, Illinois’ maintenance was determined on a case-by-case basis by each particular divorce judge. The maintenance was almost always made automatically reviewable at a later date. Different judges would give vastly different maintenance amounts and dates upon which the amount could be reviewed. It was a mess.
In 2015, maintenance awards for couples that earned less than $ 250,000 cumulatively became governed by a formula.
The 2015 law outlined that maintenance “shall be calculated by taking 30% of the payor’s gross income minus 20% of the payee’s gross income. The amount calculated as maintenance, however, when added to the gross income of the payee, may not result in the payee receiving an amount that is in excess of 40% of the combined gross income of the parties.” 740 ILCS 5/504(b-1)(1)(A)(2015)
Additionally, under the 2015 law maintenance would no longer be reviewable at a set date, but rather, it would terminate based on the length of the marriage.
“The duration of spousal support (1) shall be calculated by multiplying the length of the marriage by whichever of the following factors applies: 0-5 years (.20); 5-10 years (.40); 10-15 years (.60); or 15-20 years (.80). For a marriage of 20 or more years, the court, in its discretion, shall order either permanent spousal maintenance or maintenance for a period equal to the length of the marriage.” 5/504(b-1)(1)(B)(2015)
Maintenance And Taxes Under The Old Laws
Before Dec. 31, 2018 this maintenance payment was taxable to the person who received the maintenance.
“Gross income includes amounts received as alimony or separate maintenance payments” 26 U.S. Code Section 71(a)(2011)
The maintenance receiver would include their maintenance into their gross income when they had to pay taxes.
In turn, the maintenance payor, was able to deduct those maintenance payments from their gross income.
“In the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual’s taxable year.” 26 USC § 215(a) (2011)
So, before 2019, an Illinois maintenance payor would pay 30% of his or her income minus 20% of their ex-spouse’s income and there would be no additional tax obligation.
Maintenance And The New Tax Laws
In 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was passed which struck the part of the tax code which included alimony as income. “Part VII of subchapter B is amended by striking section 215“ and “Part II of subchapter B of chapter 1 is amended by striking section 71” (Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97 (2017))
The Tax Cuts And Jobs Act’s changes begin for any “divorce or separation instrument…executed after December 31, 2018” Pub. L. No. 115-97 (2017))
So, post-2018, maintenance payors would have to pay maintenance and the taxes associated with that maintenance while maintenance receivers would get their maintenance as a tax-free windfall.
NOTE: The stated reason for this change in the law is that the maintenance receivers weren’t declaring the maintenance they received. It’s not like a maintenance payor has to submit a W2 or some similar document to the maintenance receive for the preparation of their taxes. So, many maintenance receivers weren’t paying their taxes. In theory, this new balance of tax-liabilities guarantees that the government will get their money.
Maintenance After The New Tax Laws
The Illinois legislature quickly modified the Illinois maintenance laws so as to rebalance the maintenance amounts based on the new tax liabilities.
As of January 1, 2019 maintenance in Illinois “shall be calculated by taking 33 1/3% of the payor’s net annual income minus 25% of the payee’s net annual income.” 750 ILCS 5/504(b-1)(1)(A)
Does this perfectly accommodate each party’s new tax liabilities or lack thereof? Probably not but it’s better than nothing.
Modifications of Illinois Maintenance Awards from before 2019
“Under Illinois law, all maintenance awards are reviewable.” In re Marriage of Kasprzyk, 2019 IL App (4th) 170838
“An order for maintenance may be modified or terminated only upon a showing of a substantial change in circumstances.” 750 ILCS 5/510(a-5)
In order to establish a substantial change in circumstances for the purpose of modifying maintenance “either the needs of the spouse receiving maintenance or the ability of the other spouse to pay that maintenance has changed” In re Marriage of Anderson, 409 Ill. App. 3d 191(2011)
The change of the Illinois maintenance law itself is NOT a substantial change in circumstances.
“The enactment of this amendatory Act of the 100th General Assembly itself does not constitute a substantial change in circumstances warranting a modification.” 750 ILCS 5/510(a-5)
But, if there is a modification of maintenance after a legitimate substantial change in circumstances, the court will apply the latest version of the maintenance law.
“The court may grant a petition for modification that seeks to apply the changes made to Section 504 by this amendatory Act of the 100th General Assembly to an order entered before the effective date of this amendatory Act of the 100th General Assembly” 750 ILCS 5/510(a-5)
NOTE: there is an exception to this application of the new maintenance law that I address at the end of the article.
Who Pays The Taxes After A Post-2019 Modification Of Maintenance?
After the entry of a maintenance award made pre-2019, the tax liability remains with the maintenance receiver even after 2019.
The Tax Cuts and Jobs Act of 2017 (TCJA) removal of the tax deduction for the payor and the tax liability for the payee only applies to divorces which were entered after December 31, 2018
“Effective Date.—The amendments made by this section shall apply to—
- any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018,” Pub. L. No. 115-97 (2017))
Modifications of maintenance or alimony associated with divorces which were entered prior to 2019 can still retain their original respective tax deductions and liabilities “if the modification expressly provides that the amendments made by this section apply to such modification.” Pub. L. No. 115-97 (2017))
So, the maintenance modification order entered needs to explicitly state that tax deductions and tax liabilities will remain under the pre-2019 law.
The Illinois divorce court which modifies maintenance does not determine who shall pay the taxes on that maintenance amount. The IRS determines who is liable for those taxes. The IRS merely looks to the modification order to determine that liability.
IRS Publication 5307 clarifies that “Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018.
This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:
- changes the terms of the alimony or separate maintenance payments; and
- states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.”
So, if the IRS has any questions regarding who should pay what, you’d better have the tax-deduction and tax liability issue explicitly memorialized on the order that modified maintenance. Otherwise, the IRS is liable to apply the law as it reads currently.
There is no Illinois law requiring that the maintenance modification order requires language specifying the ongoing tax implications. You have to request that any language be included or (not included depending on your position).
When modifying maintenance the courts shall consider “the tax consequences of the maintenance payments” 750 ILCS 5/5109(a-5)(4). So, the ongoing tax consequences can and should be brought to the court’s attention and the appropriate memorialization of the court’s ruling regarding those tax consequences should be included in the final order.
If you do modify support and retain the pre-2019 tax characteristics, then you have to keep the same pre-2019 maintenance guidelines.
“Modification of maintenance orders entered before January 1, 2019 that are and continue to be eligible for inclusion in the gross income of the payee for federal income tax purposes and deductible by the payor shall be calculated by taking 30% of the payor’s gross annual income minus 20% of the payee’s gross annual income, unless both parties expressly provide otherwise in the modification order. The amount calculated as maintenance, however, when added to the gross income of the payee, may not result in the payee receiving an amount that is in excess of 40% of the combined gross income of the parties.” 750 ILCS 5/504(b-1)(1)(A-1)
If you’re trying to modify your maintenance payment or your spouse is trying to modify the maintenance payment you receive, you need to understand the tax-consequences of that modification and ensure that the final modification order complies with IRS regulations. This isn’t easy. Contact my Chicago, Illinois family law firm to schedule a free, no-obligation consultation with an experienced Chicago divorce attorney.