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What are the tax implications of alimony?

The dissolution of a marriage is an emotional and trying time accompanied by many stressors. One source of considerable stress is what the monetary consequences will mean for your standard of living and future. If you are the primary breadwinner, you may be looking at paying alimony. If you are the lower-income-earning-spouse, you may be looking at receiving spousal support. However, one question that both parties in this arrangement share is: “Will spousal maintenance be taxable?”

The new rules as of January 1, 2019

Alimony used to be deductible for the payor, which provided a tax break. The recipient of the funds had to list it as income, meaning maintenance was taxable for this party. However, this all changed in 2019.

For divorces and separation filed after January 1, 2019, the following rules apply:

  • The payor cannot deduct maintenance, meaning they must pay taxes on it.
  • The recipient does not have to include spousal support as taxable income, which gives them a significant tax break.

This new arrangement is weighted heavily in favor of the spouse receiving support.

How are the new rules affecting modifications?

If you filed your maintenance orders before January 1, 2019, the old rules still apply. However, spouses have the option to formally agree to abide by the new rules if they choose.

How has this impacted Illinois spousal maintenance laws specifically?

These changes have profoundly impacted laws on spousal support on a federal level. Illinois has responded with changes to its state laws as well.

  • Spousal support is now calculated based on net income rather than gross income.
  • The 2019 maintenance guidelines increased the percentage of payor’s income from 30% to 33.3%. The 20% figure of the recipient’s gross changed from 30% to 25% net income.
  • The 40% cap of allowable maintenance now applies to net income—not gross income.
  • The soft cap for combined maintenance, including child support and alimony, is 50% of a payor’s net income.

If a judge orders spousal maintenance, understanding the financial implications can be a steppingstone to planning your financial future—and moving forward with your life.