Taxation of separated parents

This article examines the principles of family law maintenance contributions in the tax system outside the taxation of the marital community, focusing on child maintenance contributions in the case of divorced or separated parents.

It should be added that reciprocal benefits are irrelevant for tax purposes in the case of married parents due to the principle of family taxation. Moreover, family law maintenance contributions are not only relevant in a divorce/separation context, but also, for example, in the case of unmarried parents living in a joint household (cohabitation).

By way of introduction, a brief note on the initial situation in terms of family law and statistics. The new child law has been in force since 2014. According to this revision, joint parental responsibility[1] is the normal case, and a deviating arrangement must be specially justified.[2] Accordingly, the majority of parents today have joint parental responsibility. A distinction must be made between parental responsibility and residence. Residence is the actual care of the children. Although according to the revision or its subsequent correction the possibility of alternating residence is to be explicitly examined,[3] sole residence is awarded in well over 80 % of separation cases. Alternating residence therefore does not yet correspond to the societal reality.[4]

From a tax perspective, family law obligations are relevant on three levels in particular:

1. Maintenance contributions have an impact on the parents' income side. In this context, particular caution is required when qualifying the funding streams.
2. The determined custody, i.e. the care shares of the respective parent, has an impact on the granting of social deductions.
3. Likewise, the care shares are important in determining the corresponding tax rate.

(1) Maintenance contributions

The mechanism is simple in principle: the parent liable for maintenance can deduct the maintenance payments made.[5] In return, the parent who receives the maintenance payments for the child has to pay tax on them as income.[6] The parent who receives the maintenance payments for the child has to pay tax on them as income.

Maintenance contributions are legal maintenance obligations. The obligation arises from family law in the broader sense, i.e. from the legal provisions on marriage or on the child relationship. With regard to the latter, however, the maintenance recipient must at least have parental responsibility, which also immediately clarifies that only maintenance contributions for minor children are subject to this mechanism.[7]

The decisive factor for qualification is the family law basis of the maintenance obligation. Often the obligation to pay maintenance is laid down in a court judgment or an agreement. However, this is not mandatory. For example, a verbal deviation from the agreement by the parents (so-called informal adjustment) or unmarried parents should be considered. The only decisive factor is that the benefits are regular or irregularly recurring and serve to cover the child's current living requirements.

The effective payment of maintenance must be proven, which is particularly important in the case of informally determined or modified maintenance payments.[9] In principle, there must be a flow of money from an account in the name of the parent owing maintenance to an account in the name of the parent maintaining maintenance.

According to a new decision of the Federal Supreme Court of 28 May 2021, payments to a joint account are not taken accepted. The tax law mechanism precludes payments by the parent liable for maintenance on an account which the parent can freely dispose of to be taken into account. Moreover, in case of doubt, the actual use for maintenance must be proven, whereby the sole reason for payment "contribution to the maintenance of the children" is not sufficient.[10]

It should be added that the maintenance obligation can also be fulfilled indirectly, for example by paying health insurance premiums or school costs. These expenses are also recorded as maintenance payments for tax purposes.[11]

The situation is different for children who are already of age but have not yet completed their initial education (up to the age of 25). The child is not liable to pay tax on the maintenance payments made by the parent providing maintenance to the adult child. However, the providing parent cannot deduct them from taxable income either.[12]

(2) Social deductions

In the context to be examined here, only the child deduction is to be taken into account. According to the wording of the law, this is available for every minor child or child in initial education whose maintenance is provided for by the taxpayer. This needs to be explained:

The first finding is that the deduction for maintenance contributions excludes a child deduction. This is intended to avoid double relief.[13] Thus, the child deduction is in principle available to the parent who has custody.[14] With regard to the calculation of maintenance under family law, the child deduction is thus in principle available to the parent who mainly cares for the child. This results in the following constellations:

• If one parent pays maintenance payments for the joint child to the other parent and thus deducts them for tax purposes, then the parent who pays tax on the maintenance payments received can claim the child deduction.
• In the case of alternating residence and without the payment of maintenance contributions, the child deduction is generally divided in half, irrespective of the specific care shares or the extent of the alternating residence.
• In the event that maintenance contributions are still owed despite alternating residence, the child deduction can also only ever be claimed by the parent who receives the contributions and thus also has to pay tax on them.[15]

The situation is different in the case of a joint adult child in initial education. In this constellation, the parent who makes the maintenance payments to the adult child can claim the child deduction.

The case is special in the year in which the child in initial education reaches the age of majority. According to the latest Jurisprudence of the Federal Supreme Court of March 11, 2019, a so-called "pro-rata-temporis" approach is then established for the purposes of direct federal tax. Until the day the child reaches the age of majority, the parent who receives maintenance for the child is entitled to the pro rata child deduction (number of days/365). From this day on, on the other hand, the parent who pays maintenance to the child who is now of age.[16] Many cantons also follow this Jurisprudence for the purposes of state and municipal taxes.

In addition, there are other deductions to keep in mind:[17]

• Deductions for insurance premiums and savings capital are available to the parent who can claim the child deduction. Under certain circumstances, it is thus to be granted in equal shares.[18]
• The personal care deduction, which some cantons know for the purposes of state and municipal taxes,[19] can in principle be claimed by the parent who lives with the child. In the case of alternating custody, each parent can in principle claim half of the deduction, whereby a different division of the costs must be justified and proven by the parents.

(3) Tax rates

According to the legal provisions for direct federal tax and state and municipal taxes, the parent with parental responsibility who lives with the child in the same household and is mainly responsible for the child's maintenance receives the parental rate.[20] This means that the parent who is also entitled to the child deduction and lives with the child in the same household is generally entitled to the family rate.

Reformulated in the new family law terminology and the principles explained above, the parent who has custody of the minor child receives the parental tariff. Thus, it is always the parent who receives maintenance. The parent who pays maintenance is always taxed at the basic rate.[21]

Caution is advised in the case of alternating residence without maintenance payments . In this case, it is assumed that the parent with the higher income contributes more to the maintenance of the child and is therefore taxed at the family rate and the other parent at the basic rate. On the other hand, if the taxpayers prove that both parents contribute equally to the maintenance of the child, the parent with the lower income will benefit from the family rate.[22]

Finally, care must be taken with children of full age in initial education (up to the age of 25) who live with one parent or who therefore only have a weekly tax residence at the place of study away from home. In this case, the family tariff can be claimed by the parent who lives together with the adult child. However, if the adult child has already established his or her own place of residence, the family tariff does not apply at all.

Summary

If maintenance payments are made to a minor child, the reduced family rate and the child deduction are always due to the parent who receives the maintenance payments and has to pay tax on them. This applies regardless of the residence arrangement and the amount of the maintenance contributions.

If no maintenance contributions are paid, the parent entitled to residence generally benefits from the child deduction and the family rate. In the case of alternating residence, the child deduction is divided equally in most cantons. When setting the tariff, it is mandatory to allocate the child to one parent. The principle is that the parent with the higher income is taxed at the family rate.

For children of full age (up to 25 years of age) who are in initial education, the possibility of deduction for maintenance contributions does not apply. The family rate and the child deduction continue to apply. Caution is advised here, as in these constellations one parent may be entitled to the family rate and the other to the child deduction.

Do you have any questions?

[1] For the concept and content of parental care, see Art. 301, Art. 301a, Art. 302 and Art. 303 CC.

[2] Art. 296 para. 2, Art. 298 para. 1, Art. 298b para. 2 and Art. 311 f. CC.

[3] Art. 298 para. 2ter and Art. 298b para. 3ter CC.

4] Swiss Federal Statistical Office (FSO), FSO News, Demos 1/2020, Divorces, p. 11 f. [available here]; see also parliamentary initiative to promote alternating custody.[available here];see also the parliamentary initiative on the promotion of alternating custody by NR Kamerzin, business number 21.449[available here].

[5] Art. 33 para. 1 lit. c DBG; § 40 para. 1 lit. c StG/LU.

[6] Art. 23 lit. f DBG;§ 30 lit. f StG/LU.

[7] HUNZIKER/MAYER-KOBEL, N 18a and N 21e on Art. 33 DBG, in: Zweifel/Beusch, Comm. DBG, 3rd ed. 2017; cf. also Art. 296 para. 2ZGB: "The children stand, as long as they are minors [...]".

[8] Cf. judgement of the VGer ZH of 18 August 2004 E. 3, in: StE 2005 B 27.2 No. 28.

[9] Cf. judgement of the VGer ZH of 18 August 2004 E. 3, in: StE 2005 B 27.2 No. 28.

[10] Judgement of the Federal Supreme Court 2C_380/2020 of, in:iusNet of 28 May 2021.

[11] HUNZIKER/MAYER-KOBEL, N 21e loc. cit. and on benefits in kind N 18b on Art. 33 DBG, in: loc. cit.

[12] Cf. ruling of the BGer 2C_905/2017 of 11 March 2019 E. 2.1.3.

[13] BAUMGARTNER/EICHENBERGER, N 5 ff. on Art. 35 DBG, in: Zweifel/Beusch, Komm. DBG, 3rd ed. 2017 with further references.

[14] It should be noted that tax law has not adopted the family law terminology of parental responsibility and residence, which has been adapted by revision. "care" in the context of tax law therefore means to look after.

[15] BGE 133 II 305 E. 8.4.

[16] Judgment of the Federal Supreme Court 2C_905/2017 of March 11, 2019 E. 2.2 et seq.

[17] Circular letter FTA No. 30, taxation of married couples and families, para. 14.3.2, 14.4.1, 14.5.2.

[18] Art. 35 para. 1 lit. g and Art. 35 para. 1bis DBG; § 40 para. 1 lit. g StG/LU.

[19] The direct federal tax does not know an own-care deduction, only an outside-care deduction; Art. 33 para. 3DBG; § 42 para. 1 lit. b StG/LU.

[20] Art. 36 para. 2bis DBG; § 57 para. 2 StG/LU.

[21] FTA Circular No. 30, Married Couple and Family Taxation, para. 14.3.3 and para. 14.5.3.

[22] FTA Circular No. 30, Taxation of Married couples and families, para. 14.4.2.

[23] FTA Circular No. 30, Taxation of married couples and families, para. 14.12.3.