Deductibility for Federal Tax Purposes
For several years, the Internal Revenue Service allowed taxpayers who paid alimony to deduct it from their taxable income for federal income tax purposes. Alimony was considered an “above-the-line” deduction, meaning that taxpayers could still take advantage of the standardized deduction while claiming the alimony tax deduction. At the other end, taxpayers who received alimony payments were required to report it as income on their tax returns.
However, the recently enacted Tax Cuts and Jobs Act (TCJA) reversed this dynamic, giving alimony recipients a tax deduction while requiring alimony payors to include payments as income. The reforms of the TCJA apply to spousal support awards that were issued on or after January 1, 2019. This includes older support orders that are modified in 2019. Conversely, spousal maintenance awards issued on or before December 31, 2018, are subject to the pre-TCJA alimony tax deduction.
Deductibility for Child Support Purposes
Under Illinois law, courts determine child support obligations based on the parents’ respective income levels and the child’s needs. The amount of child support a person owes is based on a percentage of their income.
Courts also recognize certain deductions with regard to determining a person’s income for child support purposes, among which is paid spousal maintenance. Someone who pays spousal support does not include such payments when calculating their income to determine how much they owe in child support. Thus, child support and spousal maintenance are inversely proportional—the lower the maintenance obligation, the higher the child support obligation.
As a result, changes in a person’s maintenance obligations directly affect the amount they owe in child support. For example, if someone with a monthly income of $6,000 used to pay $1,000 a month in maintenance they could deduct $1,000 from their monthly income, resulting in $5,000 of monthly income, a percentage of which is used to determine child support.
However, if they got the court to modify their award to eliminate their maintenance obligation, they could no longer deduct $1,000 from their income. As a result, there is more income from which they can pay child support. The custodial parent must request a modification to increase child support payments in such cases.
2019 Maintenance Guidelines
Illinois law governing spousal maintenance is unique in that courts are required to determine its terms according to statutory guidelines. Most states have statutory guidelines for the calculation of child support while reserving for courts the discretion to determine spousal support. However, in 2015, Illinois established guidelines for calculating spousal maintenance. Under the 2015 guidelines, maintenance was calculated by taking 30% of the payor’s annual income minus 20% of the payee’s annual income, capped at 40% of their combined incomes.
Until this year, the tax-deductibility of maintenance was in-line with its deductibility for calculating child support. However, after the TCJA went into effect, persons paying maintenance pursuant to a court order issued on or after January 1, 2019 are required to pay taxes on such payments. Before, a person’s income for purposes of calculating child support did not include paid maintenance. Now, those who pay spousal maintenance lose not only what they paid as support, but lose what they paid in federal taxes on those support payments.
To illustrate this idea, imagine someone with a $6,000 monthly income who owes $1,000 in spousal maintenance and is subject to a hypothetical 30% federal income tax rate. Before the TCJA, their taxable income would be $5,000 a month ($6,000 minus $1,000), after deducting their monthly maintenance payment. As a result, they essentially owe $1,500 a month in federal income taxes.
For purposes of calculating child support, their monthly income is $3,500 ($6,000 minus $1,000 in support and $1,500 in taxes). If they have a hypothetical child support obligation amounting to 30% of their monthly income, they owe $1,050 in monthly child support (30% of $3,500).
Under the TCJA, the taxpayer essentially owes $1,800 a month in federal income taxes (30% of $6,000) because they cannot deduct their $1,000 monthly maintenance payment. For purposes of calculating child support, their monthly income would be $3,200 ($6,000 minus $1,000 in support and $1,800 in taxes). As a result, they would owe $960 in monthly child support (30% of $3,200). Therefore, the TCJA—as applied to these hypothetical conditions—results in $90 fewer in child support. In reality, these calculations are on an annual scale.
In reaction to the TCJA, the Illinois General Assembly amended the spousal maintenance guidelines for 2019. Now maintenance is calculated by taking 33.3% of the payor’s annual net income minus 20% of the payee’s annual net income, capped at 40% of their combined incomes. Furthermore, if the payor’s combined child support and maintenance obligations exceed 50% of their income, courts are authorized to deviate from the statutory guidelines.
For Comprehensive Legal Counsel, Call the Law Offices of Jonathan Merel, P.C.
Family law matters often involve sophisticated financial issues with complex implications. If you have questions about Illinois maintenance and support laws, you should consult an attorney from the Law Offices of Jonathan Merel, P.C. We can help you understand the legal issues of your case.