Divorce is often an unpleasant event that also has tax consequences. As a local divorce lawyer once said, “love is not something you should talk about, it should be practiced.” Followed by: “When love is over, it's about money.” This concerns the financial consequences of a divorce. One of the most common topics in a divorce is divorce benefits or alimony. In this contribution we consider the tax consequences of this.
From a tax point of view, we distinguish between divorce through the courts and legal separation. Upon legal separation, the spouses no longer live together. This must be about living sustainably apart from each other. This means that both spouses lead separate lives after breaking up a marital relationship. It is important that the choice is in principle final and not for a short period.
Alimony payments are periodic payments that arise from the obligation to provide for the subsistence of another person. There must be an obligation to pay alimony. In the event of a divorce, spousal support or child support may be considered. Spousal maintenance is the alimony that the ex-spouse must pay to his ex-partner because he or she had a higher income during the marriage. In the case of child support, the ex-spouse must contribute to the maintenance of the children, who in that case often reside with the other ex-spouse. The amount depends on what was agreed between the ex-spouses during the negotiations or what the judge ruled. It also happens that alimony is provided in the form of free living in the house owned by the ex-spouse who is obliged to pay alimony. In that case, this free provision of independent living must be valued at 4.8% of the sales value of the home. It follows from case law that alimony payments only have tax consequences if the ex-spouses live permanently separated from each other. This can occur in both a normal divorce and a legal separation. If the ex-spouses start living together again, there is no question of living permanently apart from each other. Any agreed alimony payments will therefore have no tax consequences.
There are tax consequences for spousal maintenance for the paying and receiving ex-spouse. The recipient of spousal support is liable for income tax. He or she must declare the income from spousal support in the income tax return. The alimony payment received is subject to income tax at a progressive rate from 9.75% to 46.50% in Curaçao. If the ex-spouse pays spousal support, these payments are deductible for income tax. He or she can claim these payments as deductions in their income tax return. The tax consequences of child support are different. The ex-spouse who receives child support does not have to report this as taxable income for income tax purposes. The child support is not an income of the ex-spouse, but is a contribution to the maintenance of the children. For the payer of child support, the payments are not deductible for income tax purposes.
Please note that alimony payments may involve a number of things. The Court of First Instance of Aruba recently ruled on this matter on June 13, 2022. This ruling can also be applied to Curaçao cases as the tax legislation regarding alimony payments of both islands is similar. The taxpayer lived permanently separated from his ex-wife and paid her a monthly amount of spousal support. Taxpayer has received an income tax assessment . According to the inspector, the taxpayer deducted too large an amount in alimony payments. The amount of alimony deducted consisted of monthly bank payments to the ex-spouse, the Dutch AOW benefit from the taxpayer to which the ex-spouse was entitled and bank and foreign exchange costs. The inspector was under the impression that the monthly bank payments to the wife also included child support. And child support payments are not deductible for income tax purposes. Since the taxpayer and his ex-wife together had an adult daughter who is older than 26 years old, the Court held that there could be no question of child support. The taxpayer was right about this. The taxpayer was also right with regard to the Dutch AOW benefit. According to the inspector, this benefit was not part of the spousal support. The Dutch AOW benefit was paid into a joint account of the taxpayer and his ex-spouse. However, the taxpayer had shown that he had made several unsuccessful attempts to have his name removed from the joint account. This was not possible at the bank. According to the Court, the Dutch AOW benefit had actually been transferred to the ex-wife. However, the taxpayer was not right with regard to bank and foreign exchange costs. The Court has ruled that costs related to alimony payments are part of income expenditure. Therefore, these costs are not deductible for income tax purposes. Our legislation also provides no grounds for deducting these costs.
After the divorce is granted in a civil case and the amount of the alimony obligation is determined, tax obligations also loom. It is important that alimony received and paid is correctly processed in the income tax returns. The tax obligations must be met. If you have any doubts, please contact a tax advisor.