These last few years have seen a flourish of changes, both large and small in the Illinois Marriage and Dissolution of Marriage Act (IMDMA). The most recent changes to the IMDMA affecting the maintenance provisions are the result of recent changes to the tax code by the Trump Administration.
In the past, maintenance or alimony payments were deductible by the payor on his or her individual tax return and were included as income on the tax return of the recipient. The result was often a tax savings for both parties since the recipient of the maintenance often paid taxes at a lower rate than the payor.
The recent changes to the tax code passed by the Trump Administration change the deductibility of maintenance starting January 1, 2019. For any divorce with a new maintenance obligation entered after January 1, 2019, the payor is no longer able to deduct maintenance payments on his or her tax return.
When the maintenance formula was originally instituted many years ago, it was done with the understanding that maintenance payments would be deductible by the payor and claimed by the recipient. The old formula determined maintenance by taking 30% of the payor’s gross income, minus 20% of the recipient’s gross income, so long as this amount and the recipient’s own gross income was less than or equal to 40% of the parties’ combined gross income. Since the tax benefit will no longer exist starting January 1, 2019, the Illinois Legislature modified the formula and made other changes to the calculation of maintenance.
One significant change is how income for maintenance purposes is defined. In the old formula, we used gross income. In the new formula uses net income. Net income has the same definition as it does under the child support statute (but for maintenance payments received in the pending case), which defines net income as gross income minus either standardized or individualized tax obligations. Stated simply, net income is gross income minus your federal and state income tax liabilities.
A second significant change affects the formula used. Since we are now using net incomes and the maintenance payments are no longer tax deductible, the use of the old figures would significantly change the overall results. In an attempt to maintain similar results while using net income, the new formula calculates maintenance by taking 33.3% of the payor’s net income minus 25% of the payee’s net income, so long as the payee’s overall net income and maintenance payment is not more than 40% of the combined net income of the parties.
For those maintenance obligations entered before January 1, 2019, or being modified after January 1, 2019, the court will use the old formula (30% of gross minus 20% of gross, etc. discussed above). They will also continue to receive the same tax treatment (that is deductible by payor) unless the parties expressly agree otherwise and the agreement is included in the modification order.
As with any math problems, some examples are beneficial.
Example 1: Version of Statute until January 1, 2019.
For this first example, we will presume Spouse A earns $10,000 and Spouse B earns $1,800 per month in gross incomes and there are no minor children. Spouse A’s maintenance obligation would be $2,640.00 per month. Using standard deductions, Spouse A would have monthly net income of $5,404 per month, while Spouse B would have monthly net income of $3,760 per month. The result is that the combined net income is split 53/47, meaning that the Spouse A has 53% of the net income and Spouse B has 47% of the net income.
Example 1: Version of Statute after January 1, 2019.
With the same facts under the newly revised statute, Spouse A’s maintenance obligation to Spouse B actually decreases from $2,640 per month to $1,989 per month. However due to the fact that Spouse B does not pay taxes on this maintenance amount her monthly net income stays relatively the same at $3,540 per month. Spouse A’s net monthly income stays relatively consistent as well at $5,311 per month. This results in a 60/40 split of the overall net income, meaning Spouse A has 60% of the net income and Spouse B has 40% of the net income. Notably, however, both spouses receive less net income.
Example 2: Version of Statute until January 1, 2019.
If Spouse B earns $3,000 per month in gross income, while Spouse A still earns $10,000 per month in gross income, maintenance would be $2,200 per month due Spouse B being limited to only receiving 40% of the parties’ combined gross income. Using standard deductions, Spouse A would have monthly net income of $5,725 per month while Spouse B would have monthly net income of $4,299 per month. The net income split is 52/48% with Spouse A having 52% of the net income and Spouse B having 48% of the net income.
Example 2: Version of Statute after January 1, 2019.
Under the new provisions that are effective January 1, 2019, with these same facts, Spouse A’s maintenance obligation drops to $1,437 per month. This will give him a net monthly income of $5,863 per month, or about $140 more than under the current statute. Conversely Spouse B’s monthly net income would be $3,909 per month, a drop of about $400 per month, which is significant. However one will note that this still results in a 60/40 split of the overall income as we saw above in Example 1.
There are other changes effective January 1, 2019, to be addressed in other blog posts, including how child support will factor into these changes, further clarifications to the maintenance statute, and the establishment/re-establishment of permanent or indefinite maintenance and reviewable maintenance.
After a relative static many years regarding laws surrounding divorce, these last few years have seen a tsunami of changes, both minor and significant. We are consistently keeping track of these laws to best represent our clients. Some changes, such as the one addressed in this blog, were caused by outside events (changes to the Internal Revenue Code). Other changes are passed to reflect current societal and family law trends. Trust us with your matter and receive the direct, personal attention you deserve.Roman J. Seckel Drendel & Jannsons Law Group 111 Flinn Street Batavia, IL 60510 630-523-0543 www.batavialaw.com [email protected]