For divorcing residents in Illinois, the process of untangling their comingled lives forces them to address a lot of issues all at once. These issues range from the emotional to the practical, and they often include serious financial matters. Like it or not, divorce is as much a legal and financial event as it is an emotional and personal one. The Tax Cuts and Jobs Act that went into effect in 2018 has definitely changed how people think about their divorce agreements.
As explained by Forbes, before the new tax code was implemented, a person making spousal support payments enjoyed the ability to deduct the money paid from their tax return, essentially lowering their tax burden. The tax deduction often helped to offset or lessen the financial sting of making alimony payments to a former spouse. The person receiving alimony claimed the money on their tax return. Now, however, the person making alimony payments does so with post-tax dollars, eliminating the tax liability for the recipient.
Divorcing spouses understandably feel hesitant about paying alimony now knowing they also have to pay taxes on the money they only turn over to a former spouse. According to Bloomberg Tax, the changes may not be all negative. The old tax law regulated how much money could be paid in spousal support for three years after a divorce. Now, couples may leverage lump sum payments immediately.
The new tax code opens the door to more creative divorce settlements. Spouses may choose to divide retirement accounts differently in lieu of agreeing to alimony payments, for example.