Tax implications of maintenance payments
Q I HAVE recently separated from my wife and now make monthly maintenance payments to her. Can you please advise as to the tax treatment of these payments as I would not like to place any unnecessary tax burden on my ex wife.
A The tax effect of the maintenance payments made by you to your ex wife depends chiefly on whether these payments are made under a legally enforceable arrangement or not.
Legally enforceable maintenance arrangements include annual or periodic maintenance payments made under an order of court, deed of separation, rule of court, trust, covenant or any other act that gives rise to a legally enforceable obligation. The maintenance arrangement must be made or carried out in consideration or in consequence of a separation.
If maintenance payments are made, for the benefit of a spouse, under a legally enforceable arrangement during the year in which the couple separates then the spouse who makes the payments is entitled to a tax deduction for the payments and the spouse to whom the maintenance is paid is taxed on the payments.
A separated or divorced couple in this situation have an option to elect for joint assessment. If they do, the assessable spouse/partner can continue to claim the married credit and the standard rate band for a married couple. The maintenance payments are then ignored for the purposes of income tax, PRSI and USC.
VOLUNTARY MAINTENANCE PAYMENTS
Voluntary maintenance payments (i.e., payments that are not legally enforceable) are not taken into account when calculating either spouse's tax. This means that the spouse who makes the payments is not entitled to a tax deduction for them, the spouse who receives the payments is not taxed on them, and both spouses are taxed on their own income as single people.
Where a spouse makes voluntary maintenance payments to the other spouse and is not entitled to a tax deduction for the payments because they were not made under a legally enforceable arrangement and the payments are sufficient to either wholly or mainly maintain his/her spouse, he will qualify for the married person's tax credit but only the single person's standard rate cut-off point is due. The other spouse can also claim the single person's tax credit against his/her own income (if any).
Where there is a voluntary maintenance arrangement between spouses, each spouse will be entitled to the single person's rate band. The spouse making the voluntary maintenance payment will be entitled to claim the Married Person or Civil Partner Tax Credit, because the payment is sufficient to wholly or mainly maintain the other spouse i.e. €12,000 is greater than €8,000, and the recipient spouse will claim single credit.
MAINTENANCE PAYMENTS FOR CHILDREN
The tax treatment is different with regards to Maintenance payments that are made for the benefit of a child or children. Such maintenance payments are ignored for tax purposes. This means
- The payments are made without deduction of tax (gross)
- The person making the payments is not entitled to a tax deduction for the payments
- The payments are not taxable
- The payments are not regarded as income of the child.
Where a couple separates and no maintenance payments are made, each spouse is taxed as a single person and is responsible for filing his/her own tax return and paying tax on his/her own income.