Deadline for Spousal Maintenance Tax Deduction Expected to Cause Divorce SpikeThis is the last in a three-part series on the elimination of the alimony federal tax deduction and why you may want to complete your divorce before the change in the law goes into effect. We have already covered how losing the deduction will be costly for both spousal maintenance payers and recipients. When the payer no longer has the tax deduction as an incentive, the recipient may also receive less in spousal support payments. Fortunately, existing spousal maintenance agreements and those approved by the end of 2018 will be allowed to continue to use the deduction. This grace period was a relief to people who feared that the law would immediately eliminate the deduction. However, the new law is making 2018 a hectic year for divorce.

Divorce Rush

Though 11 months seems like plenty of time, spouses should not put off their divorce if they want to meet the deadline. Many divorce lawyers expect an increase in the number of divorce cases this year as divorcees try to take advantage of the alimony tax deduction. Completing a divorce can already be a long process, but an increased number of filings could result in couples waiting longer for court dates. It is also difficult to predict how long divorce settlement negotiations will take, particularly with high-conflict divorces. Divorcing couples are better off getting an early start in anticipation that delays may occur.

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New Tax Law May Lead to More Contentious Spousal Maintenance NegotiationsThis is the second in a three-part series on how eliminating the alimony federal tax deduction will affect divorces and why you may want to complete your divorce before the change is enacted. For spousal maintenance agreements approved in 2019 and later, the maintenance payer will no longer be allowed to deduct the payments from his or her federal taxable income. The recipient will also no longer count the payments as taxable income. The previous post explained the financial consequences of the change. Spousal maintenance recipients will save money from their taxes by reducing their total taxable income. However, the new tax law may result in lesser amounts of spousal maintenance being awarded.

Negotiating Factor

Divorcing couples have more flexibility in determining spousal maintenance payments than child support. They are free to negotiate whether to pay maintenance, how much to pay and the duration of the payments. The alimony tax deduction gives the paying parties an incentive to reach agreements because they know that they will recuperate some of the cost of the payments. Losing the deduction will make the negotiations more difficult. The greater-income spouse may be unwilling to pay as much spousal maintenance as he or she would have with the deduction. Settling for lesser spousal maintenance payments could negate the tax savings that the recipient spouse will earn with the new law. This may result in fewer divorcing couples being able to reach a spousal maintenance agreement without heading to court.

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Losing Alimony Deduction Will Be Costly for Spousal Maintenance PayersSpouses have until the end of this year to complete a divorce settlement with a spousal maintenance arrangement that will still qualify for the alimony deduction on federal taxes. As part of the recent federal tax reform law, the IRS will no longer offer the deduction for spousal maintenance agreements that are created in 2019 and later. This legal decision has tax implications for both the person who is paying alimony and the person who is receiving it. As a result, it may become more difficult for parties to agree on levels of spousal maintenance. This is the first in a three-part series on how eliminating the alimony tax deduction will affect divorces and why you may want to complete your divorce before the change starts.

Cost vs. Savings

On a basic level, the elimination of the alimony tax deduction is meant to be revenue neutral for the federal government. The IRS will collect more tax revenue from spousal maintenance payers, but spousal support recipients will pay less tax because the payments will no longer be taxable income. When putting the new law into practice, it becomes clear that spousal support payers may lose more in taxes than recipients will save. Presenting a specific example can help explain why this is the case. Because men are a majority of spousal maintenance payers, the example will follow those gender roles.

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How New Tax Law May Affect Divorce SettlementsAs discussed in a previous post, the federal tax reform law passed at the end of 2017 will directly affect divorce negotiations by eliminating the alimony deduction. For all people who create a divorce settlement after Dec. 31, 2018: 

  • The party paying spousal support can no longer claim the payments as a deduction; and 
  • The spousal support recipient does not need to report the payments as taxable income.

Taxes are an important consideration when reaching a financial settlement during a divorce. Parties who would pay spousal maintenance may be more reluctant to reach an agreement without compensation elsewhere in the settlement. There are other changes to federal tax law that will affect how divorcees negotiate their settlements and file their taxes.

Child Tax Credit

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Parental Rights with Unmarried Same Sex CouplesThough same sex couples are able to legally marry, not all couples take advantage of that right. Some couples committed to each other long before the change in the laws and do not see marriage as a necessity. Thus, the legal process of them splitting up is different from a divorce:

  • On the positive side, they have the flexibility to determine their own separation agreement without worrying about complying with divorce laws; but
  • On the negative side, they do not have the same protections that assure that their shared properties will be divided equitably.

However, unmarried same sex couples do not have flexibility when it comes to child-related issues. Child support and the allocation of parental responsibilities must comply with state laws, regardless of whether the parents are married.

Shared Parentage

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Goostree Law Group

Goostree Law Group

 555 S. Randall Road, Suite 200
St. Charles, IL 60174

 630-584-4800

 400 S. County Farm Road, Suite 300
Wheaton, IL 60187

 630-407-1777

Our Illinois divorce attorneys represent clients in Kane County, DuPage County, Kendall County and DeKalb County, including Geneva, Batavia, St.Charles, Wayne, Wasco, Elburn, Virgil, Lily Lake, Aurora, North Aurora, Elgin, South Elgin, Bartlett, Crystal Lake, Gilberts, Millcreek, Maple Park, Kaneville, LaFox, Yorkville, Oswego, Plano, Sugar Grove, Big Rock, Bristol, Newark, DeKalb, Sycamore, Naperville, Wheaton, West Chicago, Winfield, Warrenville, Downers Grove, Lombard, Oak Brook, Streamwood, Hoffman Estates, Barrington, South Barrington, Lake Barrington, Schaumburg, Big Grove, Boulder Hill, Bristol, Joliet, Kendall, Lisbon, Minooka, Montgomery, Plainfield, Sandwich, Yorkville and many other cities.

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