Is Spousal Maintenance Deductible? Yes, for now.
Under current federal tax law, amounts paid to a spouse or former spouse under a divorce or separation instrument may be considered alimony for federal tax purposes and deductible by the payer spouse. Alimony received must be included in income for tax purposes.
Currently a payment is considered alimony if the following requirements are met:
- The spouses don’t file a joint return with each other;
- The payment is in cash;
- The payment is to or for a spouse or a former spouse and made under a divorce or separation instrument;
- The divorce or separation instrument doesn’t designate the payment as not alimony;
- If the spouses are legally separated under a decree of divorce or of separate maintenance, that aren’t members of the same household when the payment is made;
- There’s no liability to make the payment after the death of the recipient spouse; and
- The payment isn’t treated as child support or a property settlement.
Some payments are not considered alimony under federal tax law, including:
- Child support;
- Noncash property settlements, whether in a lump-sum or installments;
- Payments that are your spouse’s part of community property income;
- Payments to keep up the payer’s property;
- Use of the payer’s property; or
- Voluntary payments.
Finally, if a divorce instrument provides for the payment of alimony and child support and the payer spouse pays less than the total required, the law presumes that the payment applies to child support first and only the excess amount paid above the child support obligation is deductible as alimony.
In Illinois, Alimony is known as spousal maintenance.
Changes May be on the Way
Under the Tax Cuts and Jobs Act (HR 1) passed by the US House of Representatives on November 16th, the deduction for alimony paid would be eliminated. Specifically, for parties who divorce after December 31, 2017, Section 1309 of the Act eliminates the deductibility of alimony. The Act would also apply to modification of alimony after 2017, but only if expressly provided for by such modification. Basically, if the House version of the law goes into effect, alimony will no longer be deductible for a payer spouse and will no longer be income for the recipient spouse.
The theory for eliminating the deduction under the House Bill is that those who pay alimony are usually in higher tax brackets than those receiving alimony. Therefore, current law moves income from higher tax rates to lower tax rates. The House estimates that eliminating the alimony deduction will only raise $8.3 billion in tax revenue over 10 years.
The US Senate passed HR 1 on December 2nd, but the Senate version of the bill does not change the current deductibility of alimony. We will now have to wait to see which version of the bill comes out of conference to know whether the deduction for alimony paid is eliminated.
Allison & Mosby-Scott
If you are currently going through a divorce or have questions about spousal support, the attorneys at Allison & Mosby-Scott are here to help. Please visit our website for more information on our services and spousal maintenance in Illinois.