Tag: tax

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

Posted on by Louis Fine

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.

You Need Structure: The Importance of Picking the Right Corporate Form for Your Business

Posted on by Louis Fine

Insulating Yourself from Personal Liability and Other Considerations

If you’re an entrepreneur or small business owner pouring your heart and soul into building and growing your enterprise, the dream is that all of that hard work and investment will be rewarded with success. The nightmare is that you expose your personal finances to significant risk and tax liability that can bring that dream crashing down. One of the ways to minimize those risks and protect yourself is to pick and form the right business entity.

For small businesses, this choice often comes down to two potential corporate structures: a limited liability company (LLC) or an S-corporation (often called an “S-corp”).

As alluded to above, perhaps the most fundamental reason business owners form LLCs or S-corps is to protect their personal assets from business creditors or other liabilities arising out of the operation of the business. Both of these entity types can accomplish this crucial goal, giving owners much needed peace of mind.

However, that protection can be lost if the business owners conduct their affairs in such a way as to render the company a mere “alter ego” of its owners or if they engage in fraudulent conduct. Additionally, both entities provide the benefit of treating your business income as your personal income for tax purposes.

How LLCs and S-Corps are Different

While both LLCs and S-corps provide the benefit of protecting personal assets, there are several key distinctions between LLCs and S-corps. A few of those differences include:

  • Both LLCs and S-corps are “pass-through” entities for tax purposes, which means business profits pass through the business entity and get taxed as the personal income of the owners. Here’s how it works:
    • Single Owner LLCs. If you run a single-owner LLC, you are taxed like a sole proprietorship, which means you can simply attach a Schedule C form to your personal tax return.
    • Multiple Owner LLCs. If your LLC has several owners, you can choose to be taxed as a corporation or a partnership.
    • S-Corps. In an S-corp, the corporation’s income is reported on the shareholders’ personal income taxes, based on their percentage of shares owned, regardless if they received distributions of the corporation’s income.
  • Allocation of Income. If you have others who will have an ownership share in the business, you will have to figure out how income will be allocated between you and your partners:
    • S-corps don’t give you much of a choice, as income must be distributed evenly among all owners regardless of how much labor or money each owner has contributed to the enterprise.
    • In an LLC, however, you can distribute income however you wish.
  • Corporate Formalities. One of the appealing things about an LLC is that, as a general rule, fewer corporate formalities are required than in S-corps and certainly fewer than in regular corporations. But being too casual can lead to serious problems:
    • As noted, failure to treat the LLC as a distinct entity by commingling funds, undercapitalizing the company, failing to hold meetings, etc. can result in the loss of that all-important personal liability protection.
    • While Illinois LLCs are not required to have written operating agreements, I strongly recommend that a written operating agreement be drafted and signed by all members to clarify the parties’ rights and obligations and avoid future conflicts as to its provisions.
  • Ownership Restrictions. An S-corp can have no more than 100 shareholders. By contrast, LLCs can have any number of owners and can even be owned by corporations and other LLCs.

There are numerous other nuances and distinctions regarding ownership, management, and operation of both LLCs and S-corps, and there are special types of LLCs called “Series LLCs” and “Low-profit LLCs” that may be best suited for your business. Additionally, there are other potential entities available, including general partnerships, limited partnerships, and specialized partnerships for the provision of professional services.

The Law Offices of Louis R. Fine

I understand that every business is different and that the goals and concerns of every business owner are unique. That’s why I work closely with my clients to evaluate their specific situation and determine which business structure will best set them up for success and growth. Please give me a call at 312-236-2433 or fill out my online form to arrange for your free initial consultation.