Know your tax entitlements if you are getting a separation or divorce
UNFORTUNATELY, during these turbulent economic times, separation and divorce is on the rise. Marriage break-down means that individuals and business people must take certain actions.
First of all, you should contact Revenue and let them know about your change in circumstances.
You will need to provide Revenue with the date of separation and give details of any financial arrangements entered into, such as maintenance payments to your spouse or children, maintenance payments received by you, mortgage payments, etc.
Revenue will also request a copy of any documents governing the separation, ie, deed of separation, court order or maintenance agreement.
A couple can opt to be jointly assessed, separately assessed or singly assessed for income tax. Following a separation or divorce there will be a different tax treatment depending on how you both have been assessed for income tax prior to the separation or divorce.
The assessable spouse, the person who is chargeable to tax on the couple's joint income, will be:
• Entitled to married person's allowance and married rate band for the full year.
• Taxed on his/her own income for the full year and the other spouse's income from January 1 to the date of separation.
The other spouse will be:
• Taxed on his/her own income from the date of separation to the following January 1.
• Entitled to single person's tax credit and single rate band.
Where separate assessment applied prior to separation, the spouses will be entitled to transfer unused tax credits and rate bands to each other up to the date of separation only. Where separate treatment applied prior to separation, there is no change of treatment after separation -- each spouse continues to be taxed as a single person.
Nearly every separation / divorce has maintenance payments in place. If you are paying a legally enforceable maintenance payment, for a spouse, there is some good news as you will be entitled to a tax deduction for these payments. The receiving spouse, however, will be taxed on the maintenance payment.
Voluntary payments (payments that are not legally enforceable) are not taken into account when calculating either spouse's tax.
Therefore, the spouse who makes the payments is not entitled to a tax deduction for them, the spouse who receives the payments is not taxed on them and both spouses are taxed on their own income as single persons. If you are making voluntary payments, you are entitled to the marriage tax credit but not the married tax band.
The other spouse can also claim single person's allowance against his/her own income, should they have any.
A separated couple can opt to be treated as a married couple for income tax purposes provided they are both resident in the State and maintenance payments are made under a legally enforceable arrangement.
The couple must submit a joint election if they wish to avail of this option. The election must be made in writing before the end of the tax year and must be signed by both parties.
If such an election is made the maintenance payments are ignored -- the spouse making the payments does not get a tax deduction for them and the spouse who receives the payments is not taxable on them. Where both spouses have income, separate assessment will apply. Tax credits and rate bands will be apportioned between the spouses, subject to a review at the end of the year, to transfer any unused tax allowances or rate bands.
Where only one spouse has income, the full tax credits and rate bands will be given to that spouse.
Where couples are on good terms this can be very tax efficient.
The above deals with maintenance payments to a spouse but what if the maintenance payments are made for the benefit of the children? Maintenance payments made for the benefit of children are ignored for tax purposes.
Therefore, the payments are made without deduction of tax, the payer is not entitled to a tax deduction for the payments, the payments are not taxable and the payments are not regarded as income of the child. Now we have the assessment and the maintenance payments dealt with, so what about the assets?
Any assets, including an interest in the family home, transferred from one spouse to the other spouse in the year of separation will be treated as a no gain / no loss for capital gains tax purposes.
As a result, no capital gains tax liability will arise in the year of separation. Any losses may be transferred between spouses in the year of separation.
In the years following the year of separation, assets transferred, as part of a court settlement or an official divorce, will not give rise to a capital gains tax liability.
Simon Ball is the founder of SB Tax Consultants and an associate of the Irish Taxation Institute. He can be found at www.sbtaxconsultants.com