When an Illinois couple decides to obtain a divorce, the divorcing spouses ordinarily consider only the amount of payments for alimony and child support, but they frequently overlook the impact of individual federal income tax laws on these questions. When the Illinois legislature adopted the system of flat taxes, it abolished all deductions, including the deduction for alimony paid by one ex-spouse to the other. The federal tax code, however, contains very explicit provisions on the tax treatment of alimony and child support.
Child support is the easier of the two issues. Child support is neither deductible from the taxable income of the ex-spouse who pays it nor includable in the taxable income of the spouse who receives it.
Alimony – or spousal maintenance as it is called in Illinois – must, as a general rule, be included in the gross income of the party who receives the payments. The ex-spouse who makes the payments is allowed to deduct maintenance payments from his or her gross income. To qualify for this treatment, maintenance payments must satisfy the following requirements:
• The parties must file separate tax returns
• Payments must be in cash (including checks, interbank transfers, and the like)
• The payment must be received directly by or on behalf of the former spouse
• The divorce or separate maintenance decree cannot say that the payments are not alimony
• The former spouses cannot be members of the same household
• The payment must not be treated as either child support or part of a property settlement
The right of the payor spouse to deduct maintenance payments will reduce the real cost of the payment and increase the recipient’s after-tax income. The deductibility of alimony payments may also enable the payor spouse to make larger payments than would otherwise be the case.
For couples with independent incomes, the taxability or deductibility of spousal maintenance can have an important effect on determining the amount of maintenance that a person is willing to pay or willing to accept as part of the divorce settlement. The tax consequences in any divorce should be reviewed by a lawyer who specializes in divorces and who is experienced in sorting out the many financial questions that must be resolved.
Source: Internal Revenue Service, Tax Topic 452 – Alimony Paid, accessed on Jan. 3, 2015