It is remarkable how similar many of the tax provisions we have in Ireland relating to marriage, separation, and divorce to those in other jurisdictions. This struck me when I came across an article on Hogan Injury website recently. I am attaching the article here for you to have a look https://www.hoganinjury.com/basic-tax-matters-in-family-law/
Hogan Injury is a very large Californian law firm with various offices around California.
It struck me reading this that I should perhaps do a post/article on the position in Ireland in relation to tax. Many people it would seem go through separation and divorce without considering the issue of tax to any great extent and that is unfortunate. It is an important consideration.
Sometimes couples separate without any formal arrangements. If you do this, then it is very important that you take tax advice on both of your tax positions based on whether or not you formalise your situation. We all know that running two households can stretch a budget over its natural limit and put people into debt very quickly. Should one party contact the Revenue and change the delicate balance, it can have implications for parties that were not intended when one of them agreed to move out. It is generally advised on the internet that you should inform the Revenue about your physical separation however, this is often not carefully considered by the couple or either of them before they do so. The couple or either of them have generally not sought advice before advising the Revenue of their situation. I would say do not advise the Revenue until you have taken proper advice from an accountant or solicitor with expertise in family matters and I would particularly stress that if you are not sure your separation is final then do not contact the Revenue until you are sure and until you have taken advise.
As part of the formalization of a separation or divorce, a couple should contact the Revenue Commissioners so that tax adjustments can be made for the year in which the couple separate. The couple must confirm in writing before the end of the tax year which tax option they are choosing. Gay couples may now marry as the world knows however, people may not know that as and from the 16th November 2015 Ireland no longer has the legal status of Civil Partnership available. However, couples who became civil partners before that date, are able to avail of the tax provisions applicable to married couples. There are three tax options available to married couples and they are:
Single: i.e., taxed as two single people and that option is available to a couple post separation or divorce. Please note that choosing to be taxed as a single person when you are married is not favorable in many circumstances and advise should definitely be taken on this.
Separate Assessment: The tax affairs of the spouses are independent except that some tax credits can be divided equally for example, the married tax credit, age tax credit, blind person tax credit, and incapacitated child tax credit. People who are separately assessed will on separation/divorce be assessed up to the date of separation in the normal way and can transfer any unused tax credits and rate bands to each other.
Joint Assessment: Under this one spouse is accountable for tax purposes and he/she is called the Accessible Spouse (AS). The AS is entitled to married person tax credit and double bands for the full year in which the parties separate. This can be a tremendous financial boost for a couple at a very difficult time. The year of separation throws up a unique anomaly i.e., the credits and bands available to a separating couple can actually work out higher than would otherwise apply to a married couple. The accessible spouse receives the married tax bands and the tax credits for the entire year with the alternate spouse benefiting from their own single person’s bands and credits. The couple must advise the Revenue in writing of their separation before the end of the tax year if they are opting for joint assessment and they must be resident in the jurisdiction, there must be a legally enforceable agreement in place. In addition, they must not have remarried. Advise on timing may be very important quite apart from tax advise per se.
Separated or Divorced spouses may choose to be taxed either as a married couple or single persons after the year in which they separate i.e. Single or Joint Assessment. The payment of maintenance and the type of maintenance will have a large bearing on which should apply and again advise is crucial.
Quite often people are caught out by voluntary maintenance and when they find out that they could have claimed tax relief think that they might be eligible for a refund. Note that voluntary maintenance is ignored for Income Tax purposes. Spousal maintenance is taxable in the hands of the receiving spouse. It is paid out of the payers’ gross income and is accordingly, taxable in the hands of the receiving spouse.
Apart from Income Tax, there is no CGT (Capital Gains Tax) on disposals between spouses which are made on foot of a separation agreement court order or a divorce. Capital Gains tax arises on gifts or sales. It is worth noting however that the transfer of assets after the granting of a decree that is not ordered by the court are not exempt. Another tax applicable is CAT (Capital Acquisitions Tax) and this applies to gifts or inheritances. The value of the gift or inheritance is its open market value and between spouses or civil partners, there is an exemption. Capital Acquisition tax will not apply to a property transfer made by the court on foot of a separation or divorce.
In addition to the above transfers between spouses and transfers between spouses on foot of agreement for separation, an order of the court or divorce, are exempt from stamp duty. Finally, for the purposes of this article which is not meant to be exhaustive in any sense, parties who are separated or divorced post 15-6-2000 and who arising of said separation purchase another house and the other spouse remains in the family home may qualify for a first- time house buyers’ grant.
CGT provisions and CAT are similar in California cf article of Hogan Injury referenced above.
One other matter arises since it was also mentioned in the US article referenced above, and that is what is known here as SPCCC(Single Person Child Carer Credit) which is a tax credit in favor of a person caring for children on his/her own. From January 2014 this only applies to one spouse. Previously it had the potential of being claimed by both depending on the custody/child residency arrangements. This is an allowance if you have children residing with you and you are the primary custodian/parental residence. It can, however, be waived and given to the other spouse.
Foreign divorces are recognized in Ireland and therefore a foreign maintenance order can be recognized for tax purposes.
Dry stuff, but death and taxes- what can I say, hardly amusing subjects!