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Your Options Without the Alimony Tax DeductionStarting with divorce agreements created this year, people who pay spousal maintenance as part of a divorce can no longer claim those payments as a deduction on their federal income taxes. The alimony tax deduction was used as an incentive for a spouse to pay more maintenance after the divorce. Maintenance recipients will save on taxes because the payments are no longer part of their taxable income. However, they may have more difficulty negotiating a maintenance agreement with their spouses and may not receive as much maintenance as they would have when the deduction existed. There are financial strategies available during divorce that you can use as an alternative to spousal maintenance or that could replicate some of the benefits of the alimony deduction.

  1. Property Division: You could forgo spousal maintenance and give the recipient spouse more marital properties instead. There is more certainty in the value of properties than in what you might pay or receive in spousal maintenance over several years. The transfer of money or assets between spouses during a divorce is non-taxable.
  2. Lump-Sum Payment: The spousal maintenance could be paid as a lump sum as part of the divorce. You would be free of continuous maintenance payments and any financial ties to each other once your children are adults. However, you must determine what a fair lump-sum payment would be and have the money available to make that payment.
  3. Retirement Benefits: You could use the money that you would have paid towards spousal maintenance and invest it in a retirement fund, which your spouse would receive payments from. In some situations, contributions to retirement plans can be tax-deductible. The recipient spouse would pay taxes on the money they receive from the fund but may collect more money than they would have from spousal maintenance. This plan is most effective if you are both near retirement age, so you can avoid early withdrawal penalties.
  4. Charitable Remainder Trust: If you have philanthropic interests, you could create a charitable remainder trust with your spouse as the beneficiary. The fund would pay to the beneficiary for a set period of time, and the remaining money would be donated to a charity. As with the alimony deduction, the payor could receive tax deductions for the contributions, and the recipient would be taxed for the payments.

Contact a St. Charles Divorce Attorney

The changes to the federal tax law have made reaching a spousal maintenance agreement more complicated. A Kane County divorce lawyer at Goostree Law Group can help you negotiate a reasonable maintenance agreement. To schedule a free consultation, call 630-584-4800.

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Life Insurance Can Secure Spousal MaintenanceYou and your spouse may have paid for life insurance during your marriage to financially protect each other in case one of you died. Now that you are getting divorced, what you need from a life insurance plan has changed. It makes sense to remove your spouse as a life insurance beneficiary because you do not want him or her to profit from your death. You can make your children the sole beneficiaries of the plan or cancel the plan if you do not have children. However, keeping a former spouse as a life insurance beneficiary can provide financial backing for spousal maintenance payments after a divorce.

Monetary Security

A court awards spousal maintenance when one spouse was reliant on the other to pay for their accustomed standard of living. If you will receive maintenance after your divorce, being a beneficiary on your former spouse’s life insurance policy will assure that you will be financially supported in the event of his or her untimely death. Your former spouse may change the life insurance plan to reflect the fact that you are divorced, such as:

  • Reducing the benefits that you would receive so that it would be no greater than what you would be owed for spousal maintenance; and
  • Switching from a long-term plan to a short-term plan because the maintenance payments may be temporary.

Enforcing Life Insurance

A spousal maintenance payor may reject the suggestion of also paying for life insurance to benefit his or her ex-spouse. As long as the children are financially protected, the payor may not care about a former spouse’s financial security. As the maintenance recipient, you can request that the court require your former spouse to have you as a beneficiary on a life insurance policy. 

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How Your Employment Can Affect Your Divorce AgreementState divorce laws will not allow you to gain an advantage in support payments by quitting your job or not searching for a job. Your child support and spousal maintenance can be based on what you are realistically capable of earning. Courts will not offer much sympathy to people who try to cheat the system by creating an artificial need for support. If you are capable of working, you are expected to keep your job or try to find one.

Leaving Your Job

Courts determine child support and spousal maintenance payments based mostly each spouse’s income. Thus, a spouse could seemingly reduce his or her child support obligation and qualify for spousal maintenance if he or she was unemployed. You will not fool the court if you voluntarily leave your job in order to gain an advantage. The court will instead base your income on what you are capable of earning. However, there is a difference between quitting a job and leaving a job because it conflicts with your parenting time. As a single parent, you may need to look after your children during the hours you normally work. A court may be understanding in this situation but will expect you to look for another job that fits your schedule or to find childcare services.

Losing Your Job

You may become involuntarily unemployed during your divorce due to layoffs or being fired. The court will not hold it against you if you lose your job but, once again, will expect you to be actively looking for a job. It may want you to take a job for lesser pay until you can find new employment in your field.

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When Cohabitation Can End Spousal MaintenanceSpousal maintenance payments in a divorce agreement often have a set duration, based on how long the spouses were married. In Illinois, the maintenance payor can petition to terminate the payments before the end date if the recipient has remarried or is living with someone else in a de facto marriage. Determining whether someone has remarried is straightforward, but the two sides may disagree about whether the recipient’s cohabitation is fulfilling the same role as a marriage.

Weighing the Evidence

Cohabitation becomes a de facto marriage when a spousal maintenance recipient is in an intimate relationship that includes financial support or codependency. Illinois law refers to it as living with someone on a resident, continuing conjugal basis. Illinois courts use six factors to determine whether cohabitation reaches this status:

  • The length of the relationship;
  • How often the cohabitants are together;
  • What type of activities the cohabitants do together;
  • How connected their financial affairs are;
  • Whether they vacation together; and
  • Whether they celebrate holidays together.

Recent Case

In the case of In re Marriage of Walther, an Illinois appellate court granted a man’s request to terminate spousal maintenance payments because his former wife’s cohabitation with another man qualified as a de facto marriage. The woman began seeing her new romantic partner while she was separated from her husband and moved into an apartment near him during her divorce. After the divorce, the woman slept at the man’s house on a regular basis for about a year. Her daughter moved into the man’s house about halfway through that period. The woman and her daughter eventually relocated to a new apartment after the man’s sister kicked them out of the residence. The appellate court cited several factors that pointed to this relationship being a de facto marriage:

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Illinois Adjusts Spousal Maintenance Law Ahead of New YearSince the U.S. Congress eliminated the alimony tax deduction, divorce professionals have waited to see how state governments will respond. People paying spousal maintenance will not be allowed to deduct their payments from their federal income taxes if the divorce agreement is approved after Dec. 31, 2018. Recipients will also not claim their payments as taxable income. The new law shifts the financial burden towards the paying spouse, and divorce professionals expect courts to react by awarding less in spousal maintenance. Illinois recently approved a new law that changes its directions to courts on how they should evaluate whether to award spousal maintenance and what the maintenance amount should be.

Deciding on Maintenance

The maintenance section of the Illinois Marriage and Dissolution of Marriage Act contains a list of relevant factors that a court must consider when determining whether awarding spousal maintenance is appropriate. The list instructed the court to consider “the tax implications of the property division upon the respective economic circumstances of the parties.” Lawmakers amended the section to simply state that the court should consider “the tax consequences to each party.” The amendment broadens the definition of what courts may consider in relation to taxes, which includes how not having the alimony tax deduction will affect the paying party.

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