In this blog, we will see how Separation and Divorce is a taxing issue for many people. They only find this out after the fact.
We have seen this to be problematic in a few cases where people came to us for help getting things right. It’s not an area you would expect a person to be familiar with. And it’s not a topic that would be top of the list when you are dealing with the stresses of housing and children. The topics we will focus on are.
- Separation Agreement
- Single Assessment
- Amended Assessments
- Single Person Child carer credit
- Maintenance Payments
- Tips
- Summary
Let me introduce you to Juan and Bea Long. Bea has a super job in industry and earns €100000 per annum. Juan is a part-time self-employed painter and has an average profit of €10000 per annum. They have two children, Hope aged 12 and Rock aged 15. They have a rental property in the same town. It is September 2018. Juan and Bea separate, and Juan moves into the rental property.
Separation Agreement
The primary concern for the Longs is to make sure the kids are ok, and that they get a separation agreement in place. Bea transfers her interest in the rental property to Juan. But she will pay the mortgage in full on that property which is €1000 per month. The trade-off for Bea is that Juan will not benefit from her pension.
They agreed to joint custody and confirmed that Bea would claim the single parent credit. Bea would also pay €400 per month to Juan for child maintenance. She would continue to pay his medical insurance which was €1500 per annum. The Longs are very happy to get the agreement in place and know where they stand with the kids and personal finances.
They don’t contact the tax office and Bea continues to submit tax returns as the assessable spouse. She gets some money back each year with a claim for medical insurance and medical expenses.
Single Assessment
Let’s roll forward a few years. It is January 2023 and there’s a nip in the air. Bea wants her taxes assessed as a single person under single assessment. She doesn’t want Juan to have visibility over her taxes and earnings. He has access to her “MyAccount” and can see everything.
Bea, being a very capable lady, sets the wheels in motion. She contacts the tax office to request single assessment. Plus, she applies for the single person child carer credit. Remember they agreed that she was to have this in the separation agreement. The very helpful Revenue official Frank looks for a copy of the separation agreement. All is going brilliantly, and Bea is delighted with the level of public service.
Helpful Frank didn’t fall down in the last shower. Being eagle-eyed he can see that the Longs separated in September 2018, and it stokes his curiosity. They say curiosity killed the cat, but that satisfaction brought him back. A few buttons later and curious Frank can see that the Longs were jointly assessed for 2019 to 2022. Joint assessment is for married couples or civil partners who are living together.
A few more buttons and Frank reissues tax assessments for the 4 tax years 2019 to 2022. Refunds vanish and tax liabilities appear. Bea doesn’t like Frank as much anymore.
Amended Assessments
Bea looks at her My documents section of her MyAccount to see the amended assessments. She opens them up to see what this treachery from helpful Frank will cost her. The numbers are stark.
| Tax underpaid – 2019 | €3450 |
| Tax underpaid – 2020 | €3450 |
| Tax underpaid – 2021 | €3450 |
| Tax underpaid – 2022 | €3500 |
| Total | €13850 |
She is apoplectic and has a little cry. How could Revenue do such a thing to her and how can they get away with it?
The extra tax liability arises for two reasons.
- A reduction in the lower rate band of €9000 at 20% [€1800] and
- Moving from the married tax credit of €3300 to the single tax credit of €1650
Bea needs help and fast. She arranges to meet her local Tax advisor Mark Kent to see what he can do. Mark buries his head in his big red tax book and comes up with news that he calls the Good, the bad and the ugly.
Like a dagger to the heart Mark confirms that Revenue are correct, to a point. The amended assessments issued are right. Bea and Juan shouldn’t have been jointly assessed for 2019 to 2022. They weren’t living together as husband and wife and a separation agreement was proof of that. To continue joint assessment in 2019 they needed to confirm to Revenue in writing. This wasn’t done
Single Person Child Carer Credit
Ok Mark, so that’s the bad news, where’s the good news Bea thinks! The single person child carer credit. It is set out in the separation agreement that Bea should have it, but will she qualify? Bea is.
- Single
- She is not cohabiting [ living with a partner]
- Living with a qualifying child. Hope is 16 and Rock is now 19 but in full time education.
As Bea gets the children’s allowance for Hope she is the primary claimant.
Getting the single parent credit will have a double benefit for Bea. She can claim the credit of €1650 for 2019, 2020, and 2021, and €1700 for 2022.
The second part of the benefit is the increase in her lower rate band by €4000 for each year. At 20% this is worth €800 per annum. This will save her.
| Tax year – 2019 | €2450 |
| Tax year – 2020 | €2450 |
| Tax year – 2021 | €2450 |
| Tax year – 2022 | €2500 |
| Total | €9850 |
Mark is much nicer than Frank! Despite the good news she is still €4000 worse off, and Mark isn’t working for free.
Maintenance Payments
Maintenance Payments for children are not tax deductible. However, maintenance payments to a former spouse are tax deductible provided they are.
- Legally enforceable eg through a divorce or separation agreement and
- They are annual or periodical [weekly, monthly, annual]
No deduction is available for voluntary maintenance payments to a former spouse.
Bea is making two lots of maintenance payments to Juan, being the
- Payment of the monthly mortgage of €1000
- The medical insurance of €1500
Mark informs her that she can take a deduction for the maintenance payments. If she gets a deduction, it will be income for Juan. She would get a deduction for Income Tax at 40%, PRSI at 4% and USC at 8%.
The total maintenance claim for each year will be €13500. At 52% this is a tax deduction of €7020 per annum. Juan will pay tax on the income. But the tax he pays on it will be lower as he’ll be paying a lower USC rate and 20% income tax. Plus, his credits will cover some of the liability. Assuming an effective rate for Juan of 20% his liability will be €2700 on the income.
Mark makes a claim for the maintenance payments for the 4 years. Frank in Revenue is a lot slower to issue the revised assessments this time around!
Tips
Everyone’s circumstances will be different. There will be cases where the children are no longer dependents. As a result, the single parent credit won’t be an option. If there’s no maintenance for the former spouse and no dependent children, there could be extra to pay.
Maintenance
You could consider paying a small amount of maintenance to a former spouse. This would give you the opportunity to continue joint assessment. The savings of that can outweigh the cost of the maintenance. Remember you will need to make an election for this.
Single person child carer credit
This can be a tricky tax credit and you will need to be aware of the ins and outs. The primary claimant has the option to transfer the credit to a secondary claimant. Say a primary claimant has custody of the children for most of the time but has a low income of €16000.
On that level of income, the single parent credit is of no benefit to the primary claimant. Their existing credits will be enough to cover the tax liability.
| €16000 x 20% | €3200 |
| Less Single Credit | €1700 |
| Less PAYE Credit | €1700 |
| Tax liability | Nil |
In that case, it would be better to transfer the credit to the former spouse/civil partner. But again, you need to be careful that you meet the conditions to claim it. The same goes for the secondary claimant. One of the rules is that a qualifying child must spend 100 days in a tax year with that person.
Date of Separation
The date of separation is the key date that Revenue want to know. Changes will be afoot from that date. In the year of assessment, joint assessment will apply as you are married and living as “husband and wife”. Therefore, married rate bands and credits apply for that year. The assessable spouse pays tax on
- His/her income for the full tax year and
- Their former spouse’s income up to the date of separation
From the date of separation to the end of the tax year the former spouse pays tax on his/her income. In that period the non-assessable spouse will have tax credits and a lower rate band. That could cover any tax paid in that period and result in a tax refund.
Summary
Like the heading says, Separation and Divorce is a taxing issue and is fraught with danger. Separations and Divorces are on the rise in Ireland, unfortunately. With all the upheaval and stress tax would be long down a list of priorities. We have seen the finer details for several clients over the last year. You will need to tread carefully and ensure you get help in the early stages. This will ensure both parties will be clear of the changes going forward.
Are you separated or divorced and need help understanding the taxes involved? If so, Start here
