Separation, divorce and tax – tax treatment of maintenance payments
Your guide to the tax issues associated with separation & divorce.
With the countdown to the divorce referendum well under way, our tax and private client experts answer some of the more common questions clients have when it comes to the impact separation and divorce has on their tax liabilities. Whatever the outcome of the referendum Irish couples face complex tax rules and issues with regard to separation and divorce. Here we answer some of the more frequent queries we receive.
Question #4: My spouse and I are separating. As she has not worked outside the home it has been agreed that I will provide her with a monthly allowance. How will this maintenance payment be treated for tax purposes?
Answer: There are two types of maintenance payment, voluntary maintenance payments and legally enforceable maintenance payments. The tax treatment of each type of payment is different such that careful consideration should be given when deciding which type of arrangement is made between separated spouses or divorcees.
It should be noted, maintenance payments for the benefit of a child, are always ignored for tax purposes whether paid voluntarily or under a legally enforceable agreement. The spouse who makes the payment is not entitled to a tax deduction in respect of the payment and the spouse receiving the payment is not taxed on it.
Voluntary maintenance payments for the benefit of the spouse
Voluntary maintenance payments are ignored for tax purposes. The spouse who makes the payment is not entitled to a tax deduction and the spouse receiving the payment is not taxed on it.
However, if you are paying voluntary maintenance and you are wholly or mainly maintaining your spouse then you may be entitled to claim the married persons tax credit of €3,300 rather than the single person’s credit of €1,650. The single person tax rate band which is currently €35,300 (€34,550 for 2018) will remain the same. As a rule of thumb Revenue will grant the married persons tax credit provided the maintenance payment to the spouse exceeds income that the receiving spouse earns in their own right.
Legally enforceable maintenance payments for the benefit of the spouse
A legally enforceable maintenance arrangement includes payments made under a court order, deed of separation, trust, covenant or any other act which gives rise to a legally enforceable obligation.
The spouse who makes legally enforceable maintenance payments will be entitled to a tax deduction for these payments. The tax relief can be obtained by adjusting your tax credits with Revenue in order to avail of the tax relief during the tax year rather than on submission of your Income Tax Return. To ensure that you benefit from the deduction in real time, we recommend that you contact Revenue to adjust your credits. This can be done through the My Account facility on the Revenue website.
The spouse who receives legally enforceable maintenance payments will be taxed on the payments. Income tax, Universal Social Charge and PRSI will be due on each payment. Where you are in receipt of legally enforceable maintenance payments, you are deemed to be a chargeable person and must submit an Income Tax Return each year, even where you are not in receipt of any other income.
As an alternative to the above, separated or divorced spouses may choose instead to be taxed as a married couple. The payments are ignored for tax purposes in this instance i.e. the spouse making the payment does not benefit from a tax deduction and the spouse receiving the payment is not subject to tax on the payment.
If you wish to be taxed as a married couple, you must both confirm this in writing before the end of the tax year. To be eligible you must both be resident in Ireland and there must be a legally enforceable agreement for maintenance payments. If you are divorced, you must not have remarried. Where only one of you has income, the full tax credits and rate bands will be given to that spouse.
Interim arrangements
In our experience, spouses can often take considerable time to reach an agreement in respect of all aspects of a separation/divorce. Given that there is no tax relief available for voluntary payments, it is possible to draw up an interim agreement or a deed of covenant, which would secure a tax deduction for the maintenance payments in the short term. This can be achieved provided the agreement / covenant fulfils the conditions necessary for the relief to apply.
Final thoughts
In light of the complexities surrounding the tax treatment and availability of relief in respect of maintenance payments to spouses and former spouses, we recommend that tax advice is sought at the outset.
We also recommend that tax advice is sought should your personal circumstances change and maintenance agreements are altered. It may also be necessary to review the couple’s basis of assessment.
Question #4: My spouse and I are separating. As she has not worked outside the home it has been agreed that I will provide her with a monthly allowance. How will this maintenance payment be treated for tax purposes?
Answer: There are two types of maintenance payment, voluntary maintenance payments and legally enforceable maintenance payments. The tax treatment of each type of payment is different such that careful consideration should be given when deciding which type of arrangement is made between separated spouses or divorcees.
It should be noted, maintenance payments for the benefit of a child, are always ignored for tax purposes whether paid voluntarily or under a legally enforceable agreement. The spouse who makes the payment is not entitled to a tax deduction in respect of the payment and the spouse receiving the payment is not taxed on it.
Voluntary maintenance payments for the benefit of the spouse
Voluntary maintenance payments are ignored for tax purposes. The spouse who makes the payment is not entitled to a tax deduction and the spouse receiving the payment is not taxed on it.
However, if you are paying voluntary maintenance and you are wholly or mainly maintaining your spouse then you may be entitled to claim the married persons tax credit of €3,300 rather than the single person’s credit of €1,650. The single person tax rate band which is currently €35,300 (€34,550 for 2018) will remain the same. As a rule of thumb Revenue will grant the married persons tax credit provided the maintenance payment to the spouse exceeds income that the receiving spouse earns in their own right.
Legally enforceable maintenance payments for the benefit of the spouse
A legally enforceable maintenance arrangement includes payments made under a court order, deed of separation, trust, covenant or any other act which gives rise to a legally enforceable obligation.
The spouse who makes legally enforceable maintenance payments will be entitled to a tax deduction for these payments. The tax relief can be obtained by adjusting your tax credits with Revenue in order to avail of the tax relief during the tax year rather than on submission of your Income Tax Return. To ensure that you benefit from the deduction in real time, we recommend that you contact Revenue to adjust your credits. This can be done through the My Account facility on the Revenue website.
The spouse who receives legally enforceable maintenance payments will be taxed on the payments. Income tax, Universal Social Charge and PRSI will be due on each payment. Where you are in receipt of legally enforceable maintenance payments, you are deemed to be a chargeable person and must submit an Income Tax Return each year, even where you are not in receipt of any other income.
As an alternative to the above, separated or divorced spouses may choose instead to be taxed as a married couple. The payments are ignored for tax purposes in this instance i.e. the spouse making the payment does not benefit from a tax deduction and the spouse receiving the payment is not subject to tax on the payment.
If you wish to be taxed as a married couple, you must both confirm this in writing before the end of the tax year. To be eligible you must both be resident in Ireland and there must be a legally enforceable agreement for maintenance payments. If you are divorced, you must not have remarried. Where only one of you has income, the full tax credits and rate bands will be given to that spouse.
Interim arrangements
In our experience, spouses can often take considerable time to reach an agreement in respect of all aspects of a separation/divorce. Given that there is no tax relief available for voluntary payments, it is possible to draw up an interim agreement or a deed of covenant, which would secure a tax deduction for the maintenance payments in the short term. This can be achieved provided the agreement / covenant fulfils the conditions necessary for the relief to apply.
Final thoughts
In light of the complexities surrounding the tax treatment and availability of relief in respect of maintenance payments to spouses and former spouses, we recommend that tax advice is sought at the outset.
We also recommend that tax advice is sought should your personal circumstances change and maintenance agreements are altered. It may also be necessary to review the couple’s basis of assessment.
Single Parent Child Carer Credit (SPCCC)
When you separate or divorce and you have a child that lives with you for the whole or greater part of the year that you support, you may be eligible for the Single Parent Child Carer Credit (SPCCC).
A qualifying child is a child:
- Who is born in the tax year, or
- Who is aged under 18 at the start of the tax year, or
- Who is aged over 18 at the start of the tax year but receiving full-time instruction at any university, college, school or other educational establishment
A qualifying child can also be a person over 18 who is permanently incapacitated – either before age 21 (or after age 21 while they were receiving full-time instruction)
The SPCCC is €1,650 in 2019. If you qualify for the SPCCC, you will also be entitled to an extra €4,000 in the standard rate band which increases the rate band from €35,300 to €39,300. This is a further saving of €800 where you are subject to the marginal rate of tax.
If your child lives with you for the majority of the time, you will be deemed to be the primary claimant and can claim the tax credit. However, it is possible to surrender the credit to your spouse as the secondary claimant once the child lives with them for at least 100 days out of the year.
You cannot claim the SPCCC (as a primary or secondary claimant) if you are:
- Jointly assessed as a married person or civil partner
- Married or in a civil partnership (unless separated)
- Cohabiting
When it comes to tax, the implications of informal separation, formal separation and divorce are different and can be complex. If you have any questions, please contact a member of our tax or private client teams.
