Is spousal support taxable income? Whether spousal support is taxable income for recipients depends on when their separations or divorces became final. Under current laws, alimony is not taxable in Arlington Heights and the rest of Illinois. However, if a divorce was finalized before Jan. 1, 2019, previous tax rules apply. In these cases, payers are usually able to deduct alimony payments. Recipients must report them as taxable income on federal and state returns. The exception is if the parties recently modified their divorce agreements to follow the new tax treatment.
Divorce has many tax implications that could last for years. Call The Law Offices of Roger W. Stelk at 847-506-7330 to avoid expensive mistakes.
How Is Spousal Support Calculated in Illinois?
Illinois has statutory guidelines on how to make a fair spousal maintenance agreement. Several factors guide the calculation.
State Guidelines for Alimony
Statutory guidelines can apply if both parties’ gross incomes are less than $500,000 and the spouse who is paying has no existing child support or spousal maintenance obligations. That said, the spouses are free to negotiate alimony between themselves. The court should approve an agreement as long as it is equitable.
If the parties’ combined gross incomes are more than $500,000, the court has more discretion in determining alimony. Spouses may be more inclined to negotiate alimony so they can tailor agreements to their situation, but not having a state formula can mean more uncertainty. A divorce lawyer can help whether spouses’ incomes are less than or more than $500,000.
Amount of Spousal Support
Maintenance generally is 33.3% of the payer’s net income minus 25% of the recipient’s net income. In Arlington Heights, IL, the median household income is $113,502, while the per capita income is $58,712.
Duration of Alimony
The length of the marriage determines the duration of alimony under state guidelines. The longer the marriage, the higher the amount of alimony and the longer it lasts.
For marriages lasting less than five years, alimony is capped at 20% of the marriage’s length. It increases by 4% for each year after the fifth and may be permanent for marriages lasting more than 20 years. A 10-year marriage could mean alimony that equals 44% the length of the marriage, which is about four and a half years.
Court Discretion
Courts have the discretion to deviate from the guidelines, even when both spouses’ gross incomes fall below $500,000. Judges can consider variables such as:
- Spouses’ financial resources: Including marital and non-marital assets and debts
- Needs: The payer and the recipient’s financial needs
- Earning capacity: Including whether a spouse gave up job or educational opportunities for domestic or child-rearing reasons
- Standard of living: Ideally, to give both spouses a similar standard of living after the divorce to the one they enjoyed during the marriage
The courts also consider the tax implications of the maintenance payments on both parties. It is a good idea to work with a family lawyer. This collaboration can help avoid costly mistakes. For instance, a default judgment in divorce may lead to too much or too little alimony to be equitable. Meanwhile, a recipient may mistakenly think spousal support is taxable income.
Is Spousal Support Taxable Income for the Recipient in Illinois?
In recent years, spousal support has not been taxable income for recipients in Illinois. Before the enactment of the federal Tax Cuts and Jobs Act, payers could deduct what they paid. Recipients had to report the payments as income on their tax returns and pay taxes as necessary.
Under the TCJA, separation agreements and divorces that became final after Dec. 31, 2018, do not make spousal support payments tax-deductible for the payer. This means recipients should no longer report the payments as taxable income.
The previous tax rules still apply to separation agreements and divorces that became final on or before Dec. 31, 2018. The exception is if the parties modified these agreements to explicitly state the new tax rules apply.
In a practical sense, this change can have huge tax implications. Since payers no longer get a tax deduction, they may be more likely to offer lower spousal support amounts. Meanwhile, recipients may want higher payments to offset their lack of tax liability.
Tax Strategies for Spousal Support Recipients in Arlington Heights, IL
If your separation agreement or divorce is recent enough that spousal support payments are no longer taxable, one avenue to explore is investment. Retirement accounts such as traditional IRAs and Roth IRAs offer advantages, depending on your goals and income level. If you have debt, you could use part of your spousal support payments to pay down what you owe. A financial advisor can work with you on this and on developing a tax-efficient investment strategy.
Of course, spousal support is often temporary, whether it lasts a few months, a few years, or a couple of decades. Plan for long-term financial stability as well as tax strategies. Your income, expenses, emergency fund, savings goals, and tax preparations should consider the whole financial picture.
If your separation or divorce occurred before 2019, spousal support is taxable income. You may need to set aside a portion of the money you receive to meet these obligations. On your tax return each year, report the total amount of spousal support you receive as part of your gross income.
Remarriage or changes in income, employment status, or other life circumstances could warrant modifying a spousal support agreement. These changes can have new tax implications, and older agreements can be modified to follow new tax laws. Tax professionals can help, as can family and divorce lawyers.
Get your alimony questions cleared up as soon as possible. Contact us at The Law Offices of Roger W. Stelk to discuss your case.
