Written by Admin | Jan 14, 2020 6:00:00 AM
WEDNESDAY, JANUARY 8, 2020 | SERVING CHICAGO’S LEGAL COMMUNITY FOR 165 YEARS | CHICAGOLAWBULLETIN.COM VOLUME 166, NO. 5 Different ways to reduce sting after loss of the maintenance deduction It has been a year since Specifically, Section 504 However, this is not the new alimony (com- (b-1)(1)(A) provides that always the best approach monly referred to as main- maintenance is calculated from a tax savings per- tenance in Illinois) laws by taking 33.3% of “the spective, and the tax con- became effective following payor’s net annual income sequences should be the Tax Cuts and Jobs Act’s minus 25% of the payee’s taken into consideration passage and signing into net annual income. The when dividing the marital law. Needless to say, the amount calculated as estate. act substantially altered maintenance, however, There are many differ- the Internal Revenue when added to the net ent types of creative Code. income of the payee, shall MODERN strategies that can be Among the changes was not result in the payee FA M I LY employed that could help the repeal of Sections 71 receiving an amount that spouses pay less to Uncle and 215 of the Internal is in excess of 40% of the Sam and keep more in the KATHERINE WELZ HERR Revenue Code, which combined net income of marital estate. generally provided that the parties.” First, the spouses could maintenance was an Like the Tax Cuts and choose to “pay mainte- KATHERINE WELZ HERRis above-the-line deduction Jobs Act, the calculation as nance” by transferring an associate at Schiller for the payor spouse and set forth in Section 504(b- retirement accounts that taxable income for the 1)(1)(A) only applies to DuCanto & Fleck LLP. She is were funded with pretax recipient spouse. those separation instru- well-versed in all areas of dollars to the recipient However, with the act’s ments executed after Dec. family law, including spouse. This would effec- passage, maintenance pay- 31, 2018, and does not complex financial and tively allow the payor ments made pursuant to a necessarily apply to those business matters. She is a spouse to “pay mainte- divorce or separation instruments executed strong advocate for her nance” without paying any instrument is executed prior to Dec. 31, 2018, client’s personalized needs. tax on the money and after Dec. 31, 2018, or including the modification She uses her strong shifting the tax liability to modified after that date of those instruments. analytical skills to develop the recipient spouse. that includes specific lan- Section 504(b-1)(1)(A-1) cogent legal arguments on This approach can also guage that the act’s treat- provides that modifica- her client’s behalf. She can be advantageous for the ment of maintenance tions of separation instru- recipient spouse because be reached at payments applies, is no ments executed prior to even though the recipient kwelzher r@sdflaw.com. longer an above-the-line Dec. 31, 2018, may be eli- spouse would have to pay deduction for the payor gible for inclusion in the allocate between two tax on the money when it spouse and is no longer taxable income of the spouses, adding an extra is withdrawn, the recipi- taxable income to the recipient spouse and layer of complication to ent spouse gets the bene- recipient spouse. In sum, deductible by the payor settlement negotiations. fit of a larger fund to draw maintenance is no longer spouse, as long as the This has required divorce income from. a deduction. time-honored list of spe- attorneys and financial Of course, before choos- In light of the new tax cific tax law requirements planners to become more ing to employ this law, Illinois amended Sec- are met. creative in structuring a approach, it is important tion 504 of the Illinois The practical conse- divorce or separation to confirm that the recipi- Marriage and Dissolution quence of the new law is instrument. ent spouse will not be of Marriage Act such that that unfortunately the loss When dividing marital subject to an early with- maintenance is calculated of the arbitrage of tax property, spouses may drawal penalty, meaning using the parties’ net rates between payor and intuitively think that they that the recipient spouse incomes. payee leaves less cash to want 50% of all assets. is at least 59½ years old Copyright © 2020 Law Bulletin Media. All rights reserved. Reprinted with permission from Law Bulletin Media.when the funds are with- have up to $39,475 of tax- lump sum of maintenance does not completely miti- drawn, or a qualified able income and not pay is attractive to spouses, gate the tax liability asso- domestic relations order any federal capital gains but cash does not exist to ciated with the sale of the is drafted in such a way tax. This would mean that make the lump sum pay- asset, it can be used as a that would allow the non- the recipient spouse with ment possible and it creative option to provide employee spouse (or no taxable income could would be necessary to sell cash for the payment of alternate payee) immedi- sell a capital asset with a assets, spouses can choose maintenance while at the ate access to the funds gain of $39,000 and not to utilize a new program same time reducing the without becoming subject have to pay any taxes on that comes with the pas- taxable income for the to the early withdrawal the gain. sage of the Tax Cuts and payor spouse. penalty. On the other hand, the Jobs Act — opportunity Although the Tax Cuts Spouses could also payor spouse almost zone investing. and Jobs Act includes a choose to transfer prop- undoubtedly in a higher Under this program, sunset provision, the elim- erty, such as stocks, tax bracket would likely spouses have the ability to ination of the mainte- mutual funds or real have to pay capital gains sell appreciated property nance deduction is estate, in lieu of mainte- tax on sale of that same and invest the realized permanent unless and nance, an option that is capital asset. As a result, gain in qualified opportu- until Congress decides to regularly endorsed by spouses with a large nity zone properties, or an enact new legislation. courts as it provides a investment portfolio “economically distressed Savvy spouses (and cleaner break between the could retain more funds in community” as defined by lawyers) can negotiate a spouses than a continuing the marital estate by trans- the IRS, thereby deferring win-win by utilizing cre- obligation to pay mainte- ferring capital assets with and possibly reducing the ative solutions to keep nance. high capital gains to the tax liability associated with more assets in the marital Under the 2019 tax lower income spouse. the sale of the asset. estate and less out of the rates, single taxpayers can If the idea of paying a Although this option hands of the IRS. Copyright © 2020 Law Bulletin Media. All rights reserved. Reprinted with permission from Law Bulletin Media.