What Is Included in “Gross Income” For Calculating Spousal Maintenance in Illinois?

“How much do you make?” While that may not be an appropriate or welcome question in casual conversation, it is the fundamental inquiry used to calculate the amount of spousal maintenance obligations awarded in an Illinois divorce. But for many divorcing couples, especially for those with high-net-worth, significant investments, or multiple sources of wealth, determining the actual amount of “income” which will be the foundation of these calculations involves a lot more than looking at pay stubs. Whether you are seeking a maintenance award or want to keep any such payments to a minimum, it is important to understand what constitutes “income” under Illinois Marriage and Dissolution of Marriage Act (the “Act”)

New Spousal Maintenance Guidelines  

In response to the 2017 federal tax overhaul that eliminated the tax deduction for spousal maintenance payments, Illinois lawmakers in 2018 changed the guidelines for determining how monthly payments are calculated.

As of 2018, these guidelines now apply to couples with a combined “gross income” of less than $500,000. For divorces finalized in 2019 or later, the award should be 33.3% of the payor’s net (not gross) income, minus 25% of the recipient’s net (not gross) income. The amount calculated as maintenance, however, when added to the gross income of the payee, may not result in the payee receiving an amount that is more than 40% of the combined net income of the parties.

Since net income is derived from gross income, defining the spouses’ “gross income” is the key to figuring out maintenance awards, both under the guidelines and for couples over the $500,000 threshold.

“Gross Income” Defined

Section 504 of the Act, which covers spousal maintenance, defines “gross income” as “all income from all sources,” and refers to the definition of gross income used in Section 505 of the Act regarding child support. Under that section, “gross income” means “the total of all income from all sources, except for:

  • Public assistance benefits
  • Benefits and income received by the parent for other children in the household.

Outside of those exceptions, almost every dollar, every appreciation in value, every dividend paid and every capital gain is included in gross income. The Illinois Supreme Court has ruled that the definition of “income” under the Act mirrors that found in Webster’s Dictionary:

“As the word itself suggests, ‘income’ is simply ‘something that comes in as an increment or addition * * *: a gain or recurrent benefit that is usu[ually] measured in money * * *: the value of goods and services received by an individual in a given period of time.’”

In re Marriage of Rodgers, 213 Ill. 2d 129 (2004)

Over the years, Illinois courts have made decisions about the specific forms of income to be included in gross income for purposes of spousal maintenance calculations. These include:

  • Monetary gifts
  • “Loans” in name only, such as those from a family member, a corporation, or a business the payor spouse has an ownership interest in when there is little or no expectation that the loan will be repaid or any evidence to support the claim that it is a loan rather than a gift -such as documentation, requests for repayment, or reporting the money as a loan on tax returns.
  • Salaries, bonuses, and commissions
  • Pension proceeds
  • Workers’ compensation benefits
  • Interest and appreciation of an IRA
  • Liquidation of an IRA
  • Distribution of stock sold pursuant to an employment bonus-based option

Spousal Maintenance Questions? Call Chicago Divorce Attorney Louis Fine Today

An experienced divorce attorney, working in concert with accounting and tax professionals, can ensure that the amounts used to calculate maintenance obligations include every appropriate income stream and exclude those carved out by the law so that any maintenance award is fair and equitable.

If you have questions or concerns regarding gross income or spousal maintenance generally, please give me a call at (312) 236-2433 or fill out my online form to arrange for a consultation.

More Changes Coming to How Illinois Spousal Maintenance Breaks Down After a Marriage Does

Once again, changes to Illinois law have and will alter how spousal maintenance awards are determined in divorce proceedings. Amendments to Sections 504 and 505 of the Illinois Marriage and Dissolution of Marriage Act, some of which became effective in 2018 and others which will be effective on January 1, 2019, come only three short years after legislators for the first time established specific formulas for calculating the amount and duration of spousal maintenance payments.

These changes tweak the calculation guidelines that were set in the last round of amendments. The 2018 changes altered the threshold for applying the guidelines and the percentages used in determining how long a spouse will be required to make maintenance payments. The 2019 changes as to how maintenance amounts will be calculated were a direct reaction to changes in federal tax law that eliminated the tax deduction for alimony payments.

Increase in Gross Income Level for Application of Guidelines

The guidelines established in 2015 only applied when the combined gross income of the parties was less than $250,000 and no multiple family situation existed. As of 2018, this formula now applies to couples with a combined gross income of less than $500,000, significantly increasing the number of divorces which will involve its use when maintenance is deemed appropriate.

Amount of Maintenance Payments

For divorces finalized on or before December 31, 2018, all amounts paid for spousal maintenance or alimony reduce the payor’s taxable income by the same sum. For most folks paying maintenance, this deduction represents a significant tax savings that can ease the burden of supporting an ex.

But the GOP tax plan passed a year ago eliminated that tax deduction for divorces finalized after the end of this year. Maintenance will no longer be deductible for the spouse who pays maintenance while the recipient can no longer include maintenance payments as taxable income. It is important to note that the deduction will still apply going forward for divorces entered this year or earlier.

In response to this significant change, Illinois modified the formula used to calculate maintenance awards. The current statutory formula provides that a maintenance award should equal 30 percent of the payor’s gross income, minus 20 percent of the payee’s gross income.

Example:

  • Husband’s annual gross income = $100,000 (30% = $30,000)
  • Wife’s annual gross income = $45,000 (20% = $9,000)
  • $30,000 – $9,000 = $21,000 in annual spousal maintenance to wife.

The amount calculated as maintenance, however, when added to the gross income of the payee, may not result in the payee receiving an amount that is more than 40% of the combined gross income of the parties.

For divorces finalized in 2019 or later, those guidelines are now as follows:

  • The award should be 33.3% of the payor’s net (not gross) income, minus 25% of the recipient’s net (not gross) income.
  • There will still be a 40% cap, but it will now be calculated using the combined net income of the parties rather than gross income.

Duration of Maintenance Payments

Under both the old and new laws, how long a spouse is required to pay maintenance is based on the length of the marriage. Before 2018, judges were to use the following formula in determining how long payments must continue:

  • Married 0 – 5 years = 20% of the duration of the marriage
  • Married 5 – 10 years = 40% of the duration of the marriage
  • Married 10 – 15 years = 60% of the duration of the marriage
  • Married 15 – 20 years = 80% of the duration of the marriage
  • 20 or more years = court has the discretion to order either permanent maintenance or maintenance equal to the length of the marriage.

Under this formula, for example, a 5-year marriage would result in a 1-year maintenance obligation, while a 10-year marriage would result in 4 years of maintenance payments.

The new formulas are broken down in more detail such that the percentages that apply to an 11-year marriage, for example, are now different than they are for a 14-year one. Specifically, the duration of maintenance obligations are now as follows:

  • less than 5 years (.20)
  • 5 years or more but less than 6 years (.24)
  • 6 years or more but less than 7 years (.28)
  • 7 years or more but less than 8 years (.32)
  • 8 years or more but less than 9 years (.36)
  • 9 years or more but less than 10 years (.40)
  • 10 years or more but less than 11 years (.44)
  • 11 years or more but less than 12 years (.48)
  • 12 years or more but less than 13 years (.52)
  • 13 years or more but less than 14 years (.56)
  • 14 years or more but less than 15 years (.60)
  • 15 years or more but less than 16 years (.64)
  • 16 years or more but less than 17 years (.68)
  • 17 years or more but less than 18 years (.72)
  • 18 years or more but less than 19 years (.76)
  • 19 years or more but less than 20 years (.80)

For a marriage of 20 or more years, a judge has the discretion to order maintenance for a period equal to the length of the marriage or for an indefinite term.

Judge May Deviate From Guidelines But Must Explain Why

While a judge is not required to follow the new guidelines, if they deviate from them they must explicitly state in their findings the amount of maintenance or duration that would have been required under the guidelines and the reasoning for any variance from the guidelines.

If you have questions or concerns regarding these changes or spousal maintenance generally, please give me a call at (312) 236-2433 or fill out my online form to arrange for a consultation.

If You Pay Spousal Maintenance, You’ll Pay More So the Ultra-Rich Can Get Tax Cuts Under Proposed GOP Plan

 

Divorce is already a painful proposition. It can be an expensive one as well. And if one iteration of the Republican tax scheme currently making its way through Congress actually becomes law, divorce will be even more painful and more expensive for those making spousal maintenance payments.

Under current law, all amounts paid for spousal maintenance or alimony reduce the payor’s taxable income by the same sum. For most folks paying maintenance, this deduction represents a significant tax savings that can ease the burden of supporting an ex.

Republicans Want “Divorce Penalty” to Pay for Tax Cuts for the Wealthy

If the GOP has its way, however, that deduction will disappear in order to pay for sweeping tax cuts for the ultra-wealthy. Section 1309 of the Republicans’ so-called “Tax Cuts and Jobs Act” includes a controversial provision that would eliminate the break divorcees get for paying alimony.

This would be unfair, unwise, and unwelcome for almost every person on the hook for maintenance payments.

The additional financial strain created by eliminating this crucial deduction could lead to more tension and disputes during the divorce process. For people who are struggling with the financial fallout of a divorce, including paying for two separate households, the loss of another $5,000-$15,000 per year could be devastating.

Impact on Illinois Maintenance Awards Unclear

In 2015, Illinois enacted significant changes to the law which established guidelines for how judges calculate the amount and duration of spousal maintenance awards. The guidelines only apply where the combined gross income of the parties is less than $250,000 and no multiple family situation exists. For couples within that threshold, the new law provides that a maintenance award should equal 30 percent of the payor’s gross income, minus 20 percent of the payee’s gross income.

If the spouse paying maintenance loses thousands of dollars annually because the GOP eliminates the tax deduction for those payments, it could impact how that gross income is calculated in a way that could hurt both spouses.

Call Me If You Have Questions

Obviously, the GOP’s plans have yet to be finalized and there is a long way between the hundreds of proposals in the plan and an actual piece of passed and signed legislation. But if the Republicans get their way and eliminate the spousal maintenance deduction, it represents just another way that those already struggling to meet their obligations will bear the burdens of making the ultra-rich ultra-richer.

If you are considering a divorce and have questions about how these proposed changes to the law may impact your decision-making, please give me a call at (312) 236-2433 or fill out my online form to arrange for a consultation.