One-parent family tax change a major blow
Budget 2014, following a recommendation by the Commission on Taxation in 2009, replaced the ‘one parent family tax credit’ with a ‘single person child carer credit’. In the past a couple that experienced marriage breakdown were entitled to a tax credit in respect of dependent children. In practice this was awarded to both parents. Since January of this year the re-named tax credit is available to only one parent.
The tax code has, in effect, created a hierarchy in that there is now a ‘primary’ and a ‘secondary’ parent, the former receiving the tax credit, the latter not. Revenue by default allocates the new credit to the parent in receipt of child benefit who, in the majority of cases, is the mother. Only if she cannot avail of the credit for any reason is the credit transferred to the father.
Thus the result of the change in the vast majority of cases is a decrease in the father’s tax credits of €1,650 and a €4,000 reduction in his standard tax band. According to Census 2011, there are 204,964 people either separated or divorced in Ireland. Not all have dependent children. The additional tax burden will primarily fall on the 45,276 who are males in employment.
A man earning up to the limit of the 20% tax band will pay around €600 more in tax per annum. A man subject to the 41% tax band will pay approximately €2,500 extra. The Commission on Taxation Report of 2009 states that the purpose of the one parent family tax credit was to “support labour market participation of single parents”.
Budget 2014 estimates that the partial removal of the credit will raise €18m in 2014 and €28m in a full year.
This gain has to be balanced against the cost of an anticipated fall in the labour force participation rate. The labour force participation rate for separated/ divorced people is 73% for males and 65% for females.
Higher income taxes will lower the monetary return from work. As people drop out of the labour force they are likely to register as unemployed and claim social welfare payments.
Under the old system the tax credit could have been claimed by both parents if a child resided with each parent for at least one night in the year. Under the new system, the child must reside with the secondary parent for at least 100 days in the year. This would remove the “one night” anomaly. The removal of the tax credit for the secondary parent was unnecessary other than as a revenue generating exercise.
Marriage breakdown inevitably leads to some financial distress. Separate accommodation may entail a second mortgage; there is a doubling of utility bills and transportation costs; child maintenance costs increase and there are legal bills.
The removal of the tax credit for the secondary parent could result in mortgage default.
To maintain mortgage affordability a logical reaction would be to attempt to re-negotiate child maintenance arrangements. But this can only be achieved by returning to the circuit court.
It would appear that the Commission on Taxation recommendation is an ill-conceived measure that will have significant adverse effects on a very vulnerable section of society.
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