Is Alimony Taxable in Illinois?

In recent years, spousal maintenance, also known as alimony, has changed in Illinois. State tax law changes affect the tax returns of both parties, but they may also change the amount of support ordered in a case. With the loss of tax deductibility, there may be less money to split at the end of a marriage. 

It’s essential to understand how alimony works, how tax laws work for the payer and the recipient, and how tax laws can affect the financial impact of spousal maintenance. Substantial changes in Illinois tax law took effect for spousal maintenance payments awarded after Jan. 1, 2019. People paying or collecting spousal support need to carefully review these changes before agreeing on setting up or modifying orders.

What is Alimony?

Alimony isn’t always required when a marriage ends, but the court often orders it in cases where one party has a significantly higher income or the marriage was lengthy. While it’s not required in Illinois, it is granted based on the circumstances of the case. Parties may agree to lump-sum alimony, and the party granted alimony may decline to accept it. Like child support orders, spousal support orders are only modifiable by the court.

Modifications are possible if a substantial change in either party’s circumstances occurs, such as a change in employment, loss of earning capacity, or another factor the court finds justifiable. Alimony is designed to help the spouse transition out of married life, allowing them to complete education or training to become self-sufficient. In some cases, it’s intended to provide more permanent support. The 2019 tax changes eliminated what some called a divorce subsidy, where divorced couples could have a tax advantage.

How is Alimony Calculated?

When the tax advantages of spousal support were removed for divorces granted after Jan. 1, 2019, the factors used to calculate spousal maintenance also changed. Spousal maintenance is calculated using 25% of the recipient’s net income from one-third of the payer’s net income. Previously, gross income was used for this calculation.

While statutory guidelines are set, judges have some discretion in determining spousal maintenance. The statutory threshold moved from $250,000 combined income to $500,000 combined income, with higher income couples possibly paying and receiving higher maintenance.

Maintenance payments are based on how long the marriage lasted, with maintenance for unions of over 20 years commonly ordered permanently or for an indefinite term. Indefinite maintenance terms are easier to terminate than permanent maintenance provisions. For shorter marriages, maintenance length is calculated as 20% to 40% of the length of the marriage, with the percentage increasing incrementally over time.

Courts must consider many factors of each party when granting a dissolution of marriage, including:

  • Income, property, and expenses.
  • Present and future earning capacity.
  • Impairment of the party’s present and future earning capacity seeking maintenance due to family obligations.
  • Impairment of present or future earning capacity of the payer.
  • Time and money for the party seeking maintenance to become self-supporting, including education, employment, and family responsibilities.
  • Length and standard of living during the marriage.
  • Characteristics of each party, including age, employment, income, education, liabilities, and assets.
  • Tax consequences from property division.
  • Any other relevant agreements or factors like property acquired after the divorce.

Modifying Maintenance

Maintenance payments may terminate for three reasons, but like child support orders, maintenance orders must be adjusted or terminated by the court:

  • The recipient of maintenance lives with another person on a conjugal and continuous basis.
  • The recipient remarries and must provide notice to the payer.
  • The recipient or payee dies.

Payments are still due until the court orders otherwise. Payments made after one of the qualifying events will be paid back to the payer by the recipient or the recipient’s estate. 

With the new laws, courts will look at divorce’s tax implications and consequences when making decisions. When preparing to propose a divorce settlement or modify spousal support orders, expert tax advice will help you navigate the complex laws.

Tax Implications of Alimony For the Payer

alimony tax illinois
Image via Flickr by Jenifer Correa

Alimony is no longer tax-deductible, so it isn’t a tax advantage to the party who pays the spousal support. It can’t be written off as a deduction like child support payments. Typically, the higher-income earner in a higher tax bracket is responsible for paying the child support. Previously, the tax deduction provided by spousal support helped offset the financial burden to the party responsible for the child support payments. Under current laws, payers can’t deduct maintenance payments from Illinois or federal taxes.

Since the tax burden falls on the payer, courts may be open to permitting a lower spousal maintenance payment. Those responsible for paying maintenance will also likely seek to pay less due to the tax deduction loss. A skilled tax advisor will be able to help determine the best way to divide assets and provide spousal support where tax implications are concerned.

Tax Implications of Alimony for the Recipient

While recipients of spousal support used to pay income taxes on the payments, it’s now tax-free income, with the responsible party bearing the tax burden on the money. This makes it more tax-friendly for the recipient, but it may reduce the spousal support available. Like child support, spousal maintenance isn’t considered taxable income.

The revised tax laws remove the responsible party’s previous tax break. Ultimately, the government benefits by collecting more tax dollars since the payer is presumably in a higher tax bracket. There is less money for divorcing couples to split under the new state law.

Our Team Can Help

Our tax professionals can explain the complex laws and how they affect spousal maintenance cases. Pasquesi Sheppard staff will help you decide how to structure or modify a spousal support agreement to allow the payer and the recipient to bear a smaller tax burden. We can review your current and future tax needs, helping you prepare for filing and avoiding audits while meeting financial goals.

If you have questions about filing taxes, recordkeeping, or how to handle the changing tax laws, please contact us. We’ll be happy to ensure you comply with applicable tax laws and structure your financial arrangements to receive the best results.