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 #1: My spouse and I have recently separated. How will this affect our tax position for the current year and in the future?
Answer: Following a separation or divorce, your tax obligations may change depending on how you were taxed as a married couple. As a starting point, you should firstly contact your local Revenue district and advise them of the change in your personal circumstances.
A married couple can opt to be jointly assessed, separately assessed or singly assessed for income tax. It is important to understand the different taxation options and how decisions around maintenance payments affect tax.
Where a couple is treated jointly for tax prior to separation, one spouse is chargeable to tax on the couple’s joint income, the assessable spouse. In the year of separation, the assessable spouse 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 (non-assessable spouse) will be:
- Taxed on his/her own income from the date of separation to the following end of the tax year
- Entitled to the single person’s tax credit and rate band for the full tax year
For example, John and Mary decide to separate on 15 August 2018. They are jointly assessed with John being the assessable spouse. From a tax perspective, John and Mary will continue to be jointly assessed up to 15 August 2018.
John will be jointly assessed and taxed on his total income for the year and Mary’s total income up to the date of separation. John is entitled to claim the full married rate band and married tax credit for 2018.
With effect from 15 August 2018, Mary will be taxed on her own income up to 31 December 2018 and will be entitled to the single person’s tax credit and rate band for the full tax year.
In subsequent years, a separated couple can opt to be treated as a married couple for income tax purposes provided they are both resident in Ireland, maintenance payments are made under a legally enforceable arrangement (discussed in a separate article) and an election is made in writing for the provision to apply.
Going forward, if the couple decides to divorce, the option to be treated jointly for income tax purposes will continue to apply provided neither spouse has remarried. However, in our experience this is rare as opting to be treated jointly requires an ongoing cooperation which both parties may not be interested in.
Where separate assessment applied prior to separation, there is no change in treatment after separation, each spouse continues to be taxed as a single person. However, the spouses will be entitled to transfer unused tax credits and rate bands to each other up to the date of separation.
This provision also applies in the event of a divorce.
There is no change in your tax assessment where you and your spouse were assessed as single persons prior to separation or divorce.
To conclude, in light of the upcoming referendum and depending on the outcome, many separated couples may decide to move forward and apply for divorce. We recommend that they review the basis of assessment in place during separation to ensure it is fit for purpose following divorce.
Read the answers to the rest of our tax series on separation, divorce and tax:
Question #3: My spouse and I recently separated. We are currently negotiating a maintenance agreement for the benefit of my spouse and our children. How do we quantify our maintenance needs and agree on an appropriate level of payment?
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?
Question #5: My spouse and I are separating and are concerned about how the family home will be dealt with as part of the proceedings. We may also seek a divorce at some point in the future, how will this impact the family home.
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.