Section 504 is the maintenance statute of the Illinois Marriage and Dissolution of Marriage Act. Maintenance is a spouse’s right to support (periodic payments).
The current relevant factors in maintenance awards in Illinois are:
• The income and property of each party, including marital property apportioned and non-marital property assigned to the party seeking maintenance;
• The needs of each party;
• The present and future earning capacity of each party;
• Any impairment of the present and future earning capacity of the party seeking maintenance due to that party devoting time to domestic duties or having foregone or delayed education, training, employment, or career opportunities due to the marriage;
• The time necessary to enable the party seeking maintenance to acquire appropriate education, training, and employment, and whether that party is able to support himself or herself through appropriate employment or is the custodian of a child making it appropriate that the custodian not seek employment;
• The standard of living established during the marriage;
• The duration of the marriage;
• The age and the physical and emotional condition of both parties;
• The tax consequences of the property division upon the respective economic circumstances of the parties;
• Contributions and services by the party seeking maintenance to the education, training, career or career potential, or license of the other spouse;
• Any valid agreement of the parties; and
• Any other factor that the court expressly finds to be just and equitable.
• Tax Consequences of Maintenance
Maintenance is generally taxable to the recipient and the party who pays maintenance is able to deduct the maintenance payments that are made. There are circumstances where the parties may agree that the person who receives maintenance will not have to pay taxes on maintenance. However, this is not typical. Generally, the maintenance recipient will pay taxes on the maintenance award.
Modification of Maintenance
Furthermore, maintenance can be agreed upon as modifiable or non-modifiable (unlike unallocated support discussed below). If a spouse later seeks to modify the terms of the maintenance, he/she would need to show a substantial change in circumstances to warrant modifying the prior award of maintenance. If the order for maintenance states that it is reviewable upon a specific date, then the parties have an automatic right to review the terms of the prior maintenance award and no showing of a substantial change in circumstances is necessary.
However, where the parties agree that maintenance is non-modifiable, neither party can change the terms of the maintenance before the agreed upon end date for maintenance payments, even if there is a substantial change in circumstances.
Child support is paid due to an obligation to support one’s children. Section 505 is the child support statute of the Illinois Marriage and Dissolution of Marriage Act. To establish a child support order in Illinois, the amount of child support considered for the order depends on the non-custodial parent’s net income and the number of children for which he or she is responsible. The chart below represents the minimum of what may be ordered according to the Illinois Statutory Guidelines:
|Number of Children||Percent of Non-Custodial Parent’s Net Income|
The guidelines in the chart are applied to each case unless the court makes a finding that the amount determined in the guidelines would be inappropriate after considering the best interests of the child. Relevant factors for deviations may include but are not limited to:
• The financial resources and needs of the child(ren);
• The financial resources and needs of the custodial parent;
• Standard of living the child(ren) would have enjoyed had the marriage not been dissolved, the separation not occurred, or if the parties had married;
• The physical and emotional condition of the child(ren) and their educational needs; and
• The financial resources and needs of the non-custodial parent.
• Modification of Child Support
Child support is always modifiable if there is a substantial change in circumstances. Typical changes in circumstances are an increase or decrease in net income in excess of 20% of the non-custodial parent’s net income, or a change of residential custody where the child moves permanently to the other parent’s home.
Net income is the total of all income from all sources, minus the following deductions:
• Federal income tax;
• State income tax;
• Social Security (FICA);
• Mandatory retirement contributions;
• Union dues;
• Dependent and individual health/hospitalization insurance premiums;
• Prior obligations of support or maintenance actually paid pursuant to a court order or administrative order;
• Expenses to repay debts that represent reasonable and necessary expenses for the production of income;
• Medical expenses necessary to preserve life or health; and
• Reasonable expenses for the benefit of the child and the other parent, exclusive of gifts
If net income cannot be determined, the court has the authority to order support in an amount considered reasonable in the particular case.
Tax Consequences of Maintenance
For tax purposes, child support is non-taxable to the custodial parent (who receives the child support for the benefit of a child), and non-deductible by the payor/non-custodial parent.
In many cases, a party (more often the husband) is ordered to pay both child support and maintenance. If the husband is in a higher tax bracket as compared to the wife, there can a significant tax savings if the husband pays “unallocated support” to the wife instead of separate maintenance and child support payments. Unallocated support does not specifically allocate between child support and spousal maintenance.
For example, assume a case in which there are three children. According to the statutory child support guidelines, the husband would have to pay 32% of his net income for child support. Assume also that the parties have agreed that the husband will pay 10% of his net income for maintenance for four years. It is possible to structure a financial support settlement under which the husband would pay somewhat more than 42% of his net income for unallocated support. The reason for payment of somewhat more than the 42% figure is that the husband would be able to deduct from his taxable income the entire award, rather than just the 10% maintenance portion. In addition to increasing the husband’s tax deduction, and, therefore, his after-tax cash, the payment of unallocated support in the amount of 42%+ can, in certain circumstances, increase the available after-tax income for the support recipient. Therefore, unallocated support awards can often result in a “win-win” situation for the parties because of the resulting tax savings.
It should be noted, that currently in Illinois, because child support is a part (albeit non-divisible) of unallocated support, Courts have ordered that, just like its child support component, unallocated support amount is by its very nature cannot be made non-modifiable. This means that unallocated support is always modifiable.
In Illinois, conservative practitioners lean towards separate maintenance and child support awards over unallocated support for several reasons. Although unallocated support seems to have more generous tax benefits, there are also risks and drawbacks. Unallocated support can always be modified due to the fact that child support is included within. This is risky for a spouse who may have substantial income or a spouse whose earnings are likely to increase. Also, because Illinois courts have acknowledged that there is a child support component to unallocated support, there is a concern that the Internal Revenue Service may unilaterally determine a non-taxable child support component. Before entering into any support agreement, clients are always encouraged to check with their tax advisors to determine if there is such a risk in their special circumstances.
For individuals with substantial incomes, aside from the tax issues, there is much less risk involved in making separate maintenance and child support payments in that the maintenance payment portion can be made non-modifiable during its term. This is important for individuals who foresee increased earnings, or who do not want to leave themselves open to a review of maintenance during its term.