Kieran Coughlan: Don’t forget tax advice amid trauma of divorce or separation
Divorce and separation are by their very nature contentious and difficult issues, and it is important for persons going through such events to have their eyes wide open, and to be fully aware of all the implications of the separation or divorce.
Amongst all the upheaval, ranging from moving house to changing bank accounts, and from agreeing custody arrangements to the trauma of breaking the news to family and friends, the tax implications of separation and divorce are often overlooked.
On a practical basis, persons who have separated should at the very least notify Revenue, in order that Revenue can ensure tax bands and tax credits are allocated appropriately to each estranged spouse, and that the correspondence address for each spouse is updated as appropriate.
From an income tax point of view, the year of separation throws up a unique anomaly whereby the tax band and tax credits available to the separating couple can actually work out higher than what would otherwise apply to a married couple.
This is because the assessable spouse receives the benefit of married tax bands and married tax credits for the entire year, with the alternate spouse benefiting from their own single person’s tax band and tax credits, in respect of the income they earn for the remainder of the year (from the date of separation).
As such, there can be a tax advantage in being upfront to Revenue regarding a separation.
Indeed, this tax scenario even extends to a scenario whereby a couple parts company on an amicable basis without having obtained a court separation.
For tax purposes, these income tax rules apply where the separation is of a permanent nature.
Apart from these unusual rules governing the year of separation, estranged spouses can also benefit in future years from a tax credit aimed as single parents, known as the Single Person Child Carer Credit (SPCCC).
Formerly, both spouses could claim the Single Parent Credit, but following changes introduced on January 1, 2014, the new SPCCC credit is now allocated only to one spouse.
By default, the credit is granted to the primary carer of the child, being the main person who has custody of and maintains a child who is living with him or her.
A primary carer can by way of election opt to transfer the credit to a secondary claimant, provided that the child resides with that person for a period not less than 100 days on aggregate in the year. The primary claimant can withdraw their entitlement to the credit.
On a practical basis, an individual who is a main stay-at-home carer for a child or children may have little taxable income, and the sharing of the otherwise unused SPCCC can offer a significant tax boost for the other spouse.
The SPCCC is currently worth €1,650 per annum, but only applies in the case of qualifying children, being a child under 18, or over 18 and in full time education or permanently incapacitated either before reaching the age of 21 or after reaching the age of 21 while receiving full-time instruction.
Legally enforceable maintenance payments made between estranged spouses for the benefit of the other spouse are tax deductible for the payer, and regarded as taxable income for the recipient.
In contrast, maintenance payments directed for the benefit of children are never tax deductible, and are not regarded as income of the children.
Where maintenance payments towards a spouse are not legally enforceable, such payments are ignored for tax purposes.
Couples who have divorced or separated can continue to opt in for joint assessment, where maintenance payments are made between the spouses.
Opting in for joint assessment in such circumstances can result in an overall more tax efficient outcome, with a sharing of tax bands and tax credits which may otherwise go unused or unclaimed.
Instead, the couple benefit from tax bands and tax credits as would have applied in the case of a married couple.
Maintenance payments to the benefit of one’s estranged spouse are only tax deductible to the extent that the payments are either periodical or annual in nature.
Therefore, a once-off lump sum payment does not attract a tax deduction for the payer.
In short, the fallout from divorce and separation can have significant and complicated tax outcomes, in such case persons should ensure they obtain appropriate taxation advice.
