How Can I Avoid Paying High Taxes on Alimony?

Anyone in Chicago who gets divorced and is required to pay alimony—known as spousal maintenance or support under the Illinois Marriage and Dissolution of Marriage Act (IMDMA)—should know that they will have to pay taxes on that money. Under older tax laws, the party who received alimony payments would pay taxes on that money as if it were income, and the party making alimony payments would be able to deduct that amount before taxes. However, as you probably know, the Tax Cuts and Jobs Act (TCJA) changed all of this. Now, anyone who gets divorced and pays spousal maintenance must also pay taxes on that money, while the party receiving support payments does not have to pay taxes on those payments and does not have to count them as income for federal tax purposes.

Can you limit the amount of taxes you pay on maintenance? An article in Forbes discusses ways of avoiding the tax on alimony payments, and we want to go over some of those options with you. 

Alimony Calculation Guidelines Consider Tax Law Changes

Before we get into some options for limiting taxes on alimony, we want to say more about the calculation of Illinois spousal support with regard to taxation.

The Illinois spousal support guidelines for calculating maintenance payment amounts take into account the fact that the paying spouse is now required to pay taxes on any alimony payments. The guidelines for calculating maintenance changed after the TCJA went into effect for alimony taxes, resulting in the paying spouse contributing slightly less than she or he would have if the receiving spouse still paid taxes on the money.

Yet many parties who anticipate paying spousal support want to know about options for avoiding taxes on these payments. While there is no option for simply sidestepping taxes on payments that are specifically ordered as maintenance or support, there may be options in lieu of alimony that can lessen the amount of taxes paid in the long run. In other words, the guidelines have the paying spouse paying slightly less to account for the amount of taxes paid on alimony, but many Chicago residents may want to consider alternative options nonetheless.

Retirement Account Transfers

If you want to avoid paying taxes on alimony, you will need to negotiate a property settlement with your spouse. In the property settlement, you will likely need to pay the spouse the amount of maintenance she or he would have received if the court had awarded support, but in a different form. One of those forms is through a transfer of retirement benefits. With a Qualified Domestic Relations Order (QDRO), you can transfer benefits into your spouse’s retirement account without paying a penalty or taxes on the amount.

Set Up a Trust

Rather than making monthly alimony payments, you may be able to negotiate a property settlement with your spouse that involves setting up a trust. Certain types of trusts can generate income, pay money on a regular basis to your spouse, and require your spouse to pay taxes on the amount distributed.

Contact a Chicago Spousal Maintenance Attorney

Other options may be available for avoiding alimony and accompanying taxes. An experienced Chicago spousal maintenance lawyer can discuss your options with you. Contact Arami Law, Inc. to speak with an advocate today.