Tax consequences of a divorce/separation

Change from the Spouse taxation to separate assessment

In the case of divorce and legal or effective separation, the civil status at the end of the tax period, i.e. on 31 December of the respective year, is decisive. Are the Spouses who are legally or factually separated or divorced on that date are both taxed in accordance with Art. 42 para. 2 DBG [Federal Direct Tax Act] for the entire tax period are assessed separately, each of them having to fill in a separate tax return for the whole tax year. Regarding the cantonal Regulation, the cantons usually follow federal law. As an illustrative example serves § 56 para. 2 StG/LU [Tax Act of the Canton of Lucerne]. A marriage is considered to be effectively dissolved if the will to conjugal community is lacking in at least one spouse, the common household is abolished and there is no longer any commonality of means for housing and subsistence. Decisive for the separate assessment is therefore the date of the divorce or Separation decree or the actual annulment of the joint household. Since there is often no written agreement immediately after the separation, the tax authorities are satisfied with a credible state-ment that a separation has taken place. A written proof of the separation is not mandatory. Registered partners are treated equally to spouses and therefore the same applies to them in the Event of separation or dissolution of the registered partnership.

In the first year of separation, the question also arises as to what happens to the taxes already provisionally paid or the taxes that the spouses still owe the tax authorities up to the date of separation? In principle, the spouses are jointly and severally liable for any outstanding taxes until the date of separate taxation. This means that each spouse can be held liable for the entire tax arrears. Tax amounts already paid for the tax period in which the divorce or separation took place are credited to the new current accounts to be opened for each spouse in equal parts or they are refunded in equal parts, unless there is a deviating agreement between the spouses or a court ruling (§ 194 para. 4 StG/LU).

Rates, deductions and alimony payments: Many ambiguities that need to be resolved

When filling out the first separate tax return, the problem is often that many points have not yet been settled between the newly separated or divorced spouses. Who has custody of the children? Who pays how much maintenance to whom? Who gets the joint house? If such questions are still unresolved, it is difficult to know who has to declare what in the tax return so that the spouses' tax returns do not contradict each other. In order to ensure that the correct information is provided from the outset, it is often advisable to ask the tax authorities for a deadline for submitting the tax return until the open questions have been clarified. If necessary, an initial compilation of the provisional statement of income and assets after the separation can be prepared for the provisional preparation of the tax bills and communicated to the tax authorities.

With regard to tax rates, the question arises after separation or divorce as to who may declare the preferential family rate and who must tick the rate for single persons. For spouses with children, it must also be clarified who can claim which deductions (child deduction, childcare deduction, etc.). In Circular No. 30 of the Federal Tax Administration dated December 21, 2010, the FTA for direct federal tax clearly illustrated the various rate models and deduction options depending on the specific family situation. At cantonal level, the cantons can determine their own tax practices. With regard to our example canton, the rate structure and the possible deductions have been set out in the Lucerne tax book. In the case of post-marital maintenance, the following applies in principle: the spouse obliged to pay maintenance can deduct the maintenance contributions from income, while the spouse entitled to maintenance must declare the maintenance contributions as income. The same applies to maintenance contributions for minor children. Maintenance contributions for children aged 18 and over can no longer be deducted, but do not have to be taxed by the child.

However, it is often the question of what is considered an alimony payment in the first place. For example, what if you still have a joint bank account to which one spouse pays his salary and from which the other spouse receives money? Is this also alimony? The transfer of the property or apartment can also constitute alimony. These points must be clarified quickly in the respective canton of residence and it is advisable to separate the joint bank accounts as soon as possible so that there are no inconsistencies in the spouses' lists of securities and assets. It is also recommended that all flows of money on joint accounts or between spouses are accurately recorded from the start of the separation and, if necessary, submitted to the tax au-thorities so that the qualification of alimony can be correctly communicated to the tax authorities right from the start.

Splitting of retirement provision

Another sensitive topic is then the old-age provision. Since 1 January 2017, new legal provisions apply to the division of credit balances from the occupational pension scheme (2nd pillar). In principle, however, it is still the case that the termination benefit acquired during the marriage is divided in half. If funds from the occupational benefit scheme are transferred from one spouse to the other as a result of this 50/50 division, this has no tax consequences. The income subject to AHV contributions earned during the marriage is also added up and divided equally between the two AHV accounts as soon as you declare the division by means of a form after the divorce has become final. If one spouse insists on this, the Pillar 3a pension assets can also be divided equally, unless a separation of property was agreed in the marriage contract or the payments originate from premarital savings or inheritances. However, the spouses can also divide the assets in a way other than 50/50 or voluntarily waive the 50/50 division. In this case, it should be noted that capital tax is due on a later payout of the Pillar 3a assets. This can be taken into account in the property law dispute by not crediting the full amount to the spouse who keeps the Pillar 3a assets.

Repurchase into pension fund after divorce

In the event of divorce, the retirement capital saved during the marriage in the 2nd pillar is divided equally between the spouses. As a rule, this creates pension gaps for the respective partners, which can be filled again in a tax-privileged manner through purchases. The question of whether these gaps can also be filled three years before retirement and whether the pension capital thus paid in can in turn be withdrawn as a lump-sum benefit upon retirement was disputed for a long time. The Federal Supreme Court has taken a position on this question in two landmark decisions and affirmed the withdrawal of pension assets paid into the 2nd pillar within three years before retirement due to a divorce as a lump-sum withdrawal. This is an important exception to the ban on lump-sum withdrawals for funds paid in during the three years prior to retirement.

Read more about buying into the pension fund after divorce

Taxed at source

The Swiss Tax Conference SSK, consisting of members of the cantonal tax administrations and the FTA, makes non-binding recommendations to the cantons in the tax information. In principle, the cantons adhere to these recommendations. This is also the case with the Lucerne tax book concerning the dissolution of marriage for persons originally taxed at source. A divorce or separation from a spouse with Swiss citizenship or with permanent residence under aliens law (Permit C) triggers taxation at source again for a taxable person without permanent residence under aliens law (Permit C) as of the month following the divorce or separation. However, if the spouse who is liable to withholding tax receives alimony upon divorce or separation, a change to the withholding tax procedure is waived.

And what else is there to consider?

Firstly, compensation payments under property law constitute assets and are subject to property tax at the recipient. Secondly, the allocation of real estate under divorce or separation may have further tax consequences. If real estate is transferred to a spouse, a tax deferral takes place. For example, in the case of property gains tax, it is deferred until it is sold on to a third party. Thirdly, the separation cannot be planned, but it should be noted that from a tax point of view the date of separation can have a major influence on the tax burden in the first year after the separation or divorce. If this falls close to the end of the year, this can mean for one spouse that he or she is taxed for the entire, almost expired year according to the higher rate for single persons and can also deduct no or only a few alimony contributions.

Conclusion

The above topics are a rough overview and the specific tax consequences are different for each couple. Bucher Tax AG is happy to help you - be it in the canton of Lucerne, in another canton or in a cross-cantonal or cross-border case - to set the right tax course for a fresh start in civil matters. You can also ask us specific questions on the subject of "tax consequences in the event of divorce or separation" at any time by email or via the chat function on our website. In general, it can be said that it helps to stay calm and co-llected regarding tax matters after the separation and to neatly plan the tax consequences.

Read more about divorce and AHV pensions