The divorce or separation of couples is an emotional and tense issue. Conflicts and disagreements are constant companions, be it with regard to custody, alimony payments for children or the distribution of common assets. However, the tax consequences of a divorce should not be neglected either and addressed as early as possible.
In the following, we briefly discuss the issues that should be considered from a tax perspective in a separation or divorce. For the cantonal level, the topic is illustrated using the canton of Lucerne as an example.
Change from spouse taxation to separate assessment
In the event of divorce or legal or actual separation, the civil status at the end of the tax period, i.e. on 31
December of the respective year, is decisive. If the spouses are legally or de facto separated or divorced on this date, both are assessed separately for the entire tax period in accordance with Article 42 Paragraph 2 DBG and each of them must therefore complete a separate tax return for the entire tax year. Regarding the cantonal Regulation, the cantons usually follow federal law. As an illustrative example serves § 56 Para-graph 2 StG of the Canton of Lucerne. A marriage is considered to be effectively dissolved if the will to con-jugal 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 arises as to what happens to the taxes already provisionally paid or the taxes that the spouses still owe to the tax authorities up to the separation date? In principle, the spou-ses are jointly liable for still outstanding taxes until the time of separate Taxation. This means that each spouse can be prosecuted for the entire amount of outstanding taxes. Tax amounts already paid for the tax period in which the divorce or separation took place, will be credited equally to the newly opened current accounts of the spouses or they will be reimbursed in equal parts, unless there is a deviating agreement or judicial regulation between the spouses (§ 194 Paragraph 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 between the newly sepa-rated or divorced spouses have not yet been settled. Who has custody of the children? Who pays who how much alimony? 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 tax returns of the spouses do not contradict each other. To ensure that the correct information is provided from the start, it is often advisable to ask the tax authorities for a deadline for filing the tax return until the open questions have been clarified. If necessary, a first summ-ary of the provisional statement of income and assets after the separation can be prepared for the provisio-nal preparation of the tax accounts and communicated to the tax authorities.
In the case of tax rates, after separation or divorce, the question also arises as to who may declare the pre-ferential Family rate and who must select 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 the Circular Nr. 30 of the Swiss Federal Tax Authority (SFTA) from 21th of December 2010, the authority has vividly illustra-ted a wide variety of tariff models and deduction options for the direct federal tax. On cantonal level, the cantons can determine their own tax practice. Regarding our example canton, the tariff structures and the possible deductions are provided in the Lucerne Tax Book. In the case of postmarital alimony, the following applies in principle: the spouse obligated to pay alimony can deduct the alimony contributions from the in-come, the dependent spouse must declare the alimony contributions as income. The same applies to ali-mony contributions for underage children. Alimony contributions for children over the age of 18 can no longer be deducted, but do not have to be declared by the children.
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 issue is the retirement provision. Since 1 January 2017, new legal provisions apply to the allocation of assets from occupational pension plans (2nd pillar). In principle, however, the termination bene-fit acquired during the marriage is still divided equally. If pension assets are transferred from one spouse to the other as a result of this equal division, this has no tax consequences. The AHV-liable income earned during the marriage is also added together and divided equally between the two AHV accounts as soon as you register the division using the form after the legally binding divorce. If a spouse insists on this, half of the retirement assets in pillar 3a can also be divided, unless separation of assets has been agreed in the marri-age contract or the payments come from premarital savings or inheritances. However, the spouses can also share in other ways than in equal parts or voluntarily waive the equal division. In this case, it should be no-ted that a capital tax is due when the pillar 3a credit balance is paid out at a later date. This can be taken into account in matrimonial disputes by not crediting the full amount to the spouse who retains the assets from pillar 3a.
Repurchase into pension fund after divorce
As a result of the divorce, the retirement capital saved during the marriage in the 2nd pillar is divided equally between the spouses. As a rule, this results in gaps in pension provision for the respective partners, which can be filled again by repurchasing at a tax-privileged rate. The question was long disputed as to whether these gaps could also be filled 3 years before retirement and whether the pension capital paid in as a result could in turn be drawn as a capital payment upon retirement. In two landmark rulings, the Federal Supreme Court gave its opinion on this question and affirmed the receipt of pension assets that were paid into the 2nd pillar due to a divorce within 3 years before retirement as capital payments. This is an important exception to the prohibition of capital payments for funds paid in during the 3 years prior to retirement.
Individuals taxed at source
The Swiss Tax Conference (SSK), consisting of members of the cantonal tax administrations and the Swiss Federal Tax Authority, makes non-binding recommendations to the cantons. In general, they adhere to them. And this is also the case for the Lucerne Tax Book concerning the dissolution of the marriage of indi-viduals initially taxed at source. According to the Lucerne Tax Book, a divorce or separation from a spouse with Swiss citizenship or with a residence under immigration law (C permit) for a taxable person without a residence under immigra-tion law (C permit) will again result in taxation at source from the month following the divorce or separation. However, if the spouse, who is liable to withholding tax, receives alimony with the divorce or separation, no change to the withholding tax procedure is made.
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 conse-quences. If real estate is transferred to a spouse, a tax deferral takes place. For example, in the case of pro-perty 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.
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.