By Tequia Burt
Chicago Lawyer correspondent
New legislation on both the federal and state level is affecting how family lawyers in the Chicago area conduct business.
“All the new legislative changes, both in Illinois maintenance and child support laws and in the federal tax laws and understanding how they all impact each other financially is one of the most important issues facing family lawyers today,” said Janet E. Boyle of Boyle Feinberg Sharma. “So many things that we’ve historically done and have been part of our way of doing things for many years have all of a sudden kind of been turned on their ear.”
Tremors from the federal Tax Cuts and Jobs Act of 2017 continue to be felt across the legal field. On Jan. 1, 2019, federal tax law permanently eliminated the ability of the spouse paying spousal maintenance, or alimony, to deduct the maintenance payments from gross income in their federal taxes.
Now, alimony payments are no longer tax-deductible for the maintenance payor and no longer included in the taxable income of the maintenance recipient.
“The Tax Cuts and Jobs Act at the federal level fundamentally sort of altered the landscape of maintenance,” said Brendan Hammer, a partner at Berger Schatz. “Maintenance going forward in new judgments is no longer tax-deductible. That has had an enormous impact on a lawyer’s ability to craft a creative settlement. Maintenance used to be deductible to the payor and includable in income to the payee, but now it is sort of tax-neutral. From a cash flow perspective, that sort of takes pieces off the table in terms of playing with tax treatment to arrive at a mutually advantageous figure.”
Previously, the tax deduction helped soften the blow to spouses reluctant to pay out huge alimony payments. The payor could deduct the payments, and the recipient got more money.
“Before the tax law took effect, high earners especially benefited — if you were taking maintenance dollars and making them tax-deductible at a high tax rate and then making them taxable at a lower tax rate for the payee, then both people ended up with more money because you were taxing the dollars that were being paid at alimony at a lower tax rate than they would be taxed at if the person paying maintenance were paying the tax,” explained Meighan Harmon, managing partner at Schiller Ducanto & Fleck. “For some families, it created a little bit of a tax arbitrage where you could end up with a little bit more net cash to give, to allocate between ex-spouses. Now we have to do the calculations based upon net income as opposed to looking at growth income and taking advantage of that tax arbitrage.”
Different math
On top of all that, the passage of the tax reform bill triggered changes to Illinois’ maintenance statute and how spousal and child support is calculated.
“The way that the current statute is set up in Illinois, child support and maintenance are all calculated on net income, after-tax income,” said Cecilia Griffin of Griffin McCarthy & Rice.
Those changes made at the federal level to the Internal Revenue Service Code directly affect child support and maintenance because your net income is calculated differently now.”
Now, instead of being based on gross income, spousal maintenance is calculated using the parties’ net incomes. The 2019 maintenance guidelines changed from 30% of payor’s gross to 33.3% of the payor’s net income. The 20% of the recipient’s gross changed to 25% of net income. There continues to be a 40% of cap regarding maintenance, but it is only applicable to net income.
The new child support guidelines are also much more complex.
“Our new child support guidelines are way more complicated than previous guidelines; the new guidelines take into consideration both the payor and the payee’s income,” Harmon said. “They also take into consideration the amount of time that each child or that the children spend in each parent’s home.”
In the past couple of years, Illinois adopted an “income shares” model to calculate child support. Payments are based on the combined income of a couple, cost of living and number of children. Now, new this year, the amount of time each parent spends with the child affects the amount of child support.
Harmon said that while the new guidelines may create a “headache” for attorneys, she pointed out that software exists to help ease the burden and that the good outweighs the bad.
“In general, the trend toward more consistency case-to-case, county-to-county is a good thing,” she said. “One of the hardest things that we do as family law attorneys is set appropriate expectations for our clients, and if both sides in any case have the same expectation set for them, then there’s going to be a lot less litigation.”
Gray divorce
However, Berger Schatz’s Hammer said the legislative changes have created some major challenges for family lawyers and their clients.
“These legislative changes have led to significantly reduced child support awards, which primarily flow to women,” he said. “And that has been coupled with a simultaneous downward drag on maintenance awards, which also flow primarily to women.”
Harmon also admitted the changes in maintenance “resulted in lesser child support” and also pointed out it could have a negative effect on non-working unmarried parents after a break-up.
“With the reduction and the substantial reduction for some people in the child support guideline, it’s really, really made vulnerable nonworking people who aren’t married but who have been supported by someone for many, many years,” she said. “We see that all the time, long-term couples, maybe they have a couple of children together, not just one. They’ve been together for a really long time, and one of the members of the couple — often the woman but not always — hasn’t worked, and they really don’t have an ability to support themselves at anywhere near the standard of living they’ve been enjoying while they’ve been in this couple, and what they’re going to end up getting in child support is now substantially less than what it was previously.”
Harmon also said the changes also don’t take into account where people live and how that might impact support. “There are some issues with the guidelines to the extent that they don’t really appropriately factor in a wide variety of cost of living,” she said. “Downstate to Chicago is pretty different in terms of what kids cost or what the cost of living might be in those different areas.”
Boyle said the changes in maintenance are particularly detrimental to older divorcing couples. According to the Pew Research Center, “gray divorce” is on the rise among Americans 50 and older. The divorce rate for these baby boomers has doubled since the 1990s, and Boyle has seen a corresponding uptick in older clients at her firm.
“The changes are very unfair to divorcing spouses who did not have the same earning capacity as the other in a long-term marriage,” she said. “You’ve got this situation where two have planned their retirement, they’ve planned their future, and now the divorce comes in and changes that; that plan for the retirement is rarely sufficient to support two lifestyles moving forward. And now because of the maintenance issue, you’re running into this situation where the one higher-earning spouse can have a much better retirement than the lower-earning spouse. And that wasn’t their plan, or their future, and since fault isn’t an issue in Illinois, you can have someone who just destroys the other spouse’s vision of what their retirement and their future were going to look like.”
Coming to the table
Though the new legislative changes are helping to standardize maintenance guidelines across the state, one way to help divorcing couples amicably navigate all these changes in tax laws and child support and alimony challenges is with alternative dispute resolution via mediation, according to Griffin.
“Giving clients the ability via mediation to collaboratively create a post-divorce financial and family plan is just priceless,” she said.
Griffin said mediation is on the rise because it enables divorcing parties to have some control over what happens after the divorce, rather than just following the court’s marching orders.
“When I started out three decades ago, you had one alternative, you filed for divorce and you went through the court system,” she said. “But now, we have two defined areas, additional ways to practice in family law that are out there, that can be offered to clients: collaborative law and mediation, and they’re not just esoteric processes. They’re actual thought-out, protocols that help people and help families create a post-divorce plan that works for their family. The parties have invested themselves in it and come to something that they both can know that they’ve agreed to and can live by, instead of a court mandating that this is the way their family is going to live post-divorce.”
Hammer said ADR is on the rise at his firm — so much so that mediations are present in almost every case. However, while mediations can be critical to crafting post-divorce settlements everyone is happy with, he warned mediation can create more problems for lawyers if, ultimately, the case is not settled amicably.
“If a case is in ADR and all of a sudden the bottom falls out on it, it can be very difficult because you aren’t starting from the gate, you’re starting from maybe one or two laps around the oval,” he said.
For successful mediations, Hammer urges attorneys to prepare more than they think they should for mediation, actively listen to their clients, and anticipate the opposing attorneys’ negotiation tactics. Above all, he said, focus on your client’s wants and needs.
“Understand the client’s true goals and interests. Not just position, but what really matters to them and why? Understanding what is actually motivating them is essential.”
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