B Law & Tax
26 July 2023

Tax advisor: Consequences of divorce on your Personal Income Tax return

First of all, in case of a divorce, the possibility that the whole family unit, composed of spouses not legally separated and their minor or disabled children, can be taxed jointly, disappears. Instead, in the event that the former spouses have minor or adult children with disabilities in common, the family unit can only be formed by one of them, and will be distinguished as follows:

If the custody of the children is held by one of the parents, only that parent will have the option to be taxed jointly with the children. In the case of joint custody, either parent can opt for joint taxation, but only one of them. It is essential to agree on which of the former spouses will file the joint tax return. It is usual that in the divorce agreement it is established that one of the ex-spouses will file the joint tax return in even years, and the other one in odd years.

The former spouse who chooses to be taxed jointly with the children may benefit from a reduction of 2,150 euros (according to Article 82.2.4º of the Personal Income Tax Law, LIRPF) which will reduce the amount subject to tax.

Minimum amount for children and annual child support payments

In case of divorce, the former spouse who pays alimony in favor of the children receives special tax treatment. The payments are exempt for the children and the former spouse is subject to a special regime with tax reduction and an increase in the personal minimum of 1,980 euros (Art. 64 of the LIRPF).

Both the minimum for descendants and the regime of annuities for alimony have the same purpose: to reduce the tax burden of the taxpayer for the basic needs of his children. However, they cannot be applied simultaneously, and their use depends on different situations:

– If the parent making the payments is not entitled to apply the minimum for descendants (because his or her children are over 25 years of age or receive income over 8,000 euros net per year, or 1,800 euros net per year in the case of filing a return), he or she must use the maintenance annuity regime.

– If the parent making the payments is entitled to apply the minimum for descendants (because his/her children are 25 years old or younger and obtain net income equal to or less than 8,000 euros per year, or 1,800 euros if they file a tax return), different options will apply depending on the cohabitation and the type of contribution:

  • If you cohabit with the descendant (shared guardianship and custody) and make alimony payments, you must compulsorily apply the minimum for descendants.
  • If you do not live with the descendant, but you cover 50% of the living expenses, school, etc., you must apply the minimum for descendants.
  • If you do not live with the descendant and you make payments for alimony, you will be asked to choose between applying the minimum for descendants or the regime of annuities for alimony, as established by the General Directorate of Taxes (Consultation V2098-18, of July 16).

– In the event that the parent does not live with the descendant and does not make alimony payments, only the parent who has custody of the descendant may apply the minimum for descendants in full.

Financial compensation and annual payments for the support of the spouse

In divorce cases where there is an imbalance of assets between the spouses, it is common for the judge or the regulatory agreement to establish a compensatory pension in favor of the spouse facing economic difficulties. These payments receive the following tax treatment:

– The spouse making the payments can deduct the total amount paid from his/her taxable income in the Personal Income Tax (IRPF), which reduces his/her tax burden (according to Article 55 of the LIRPF).

– The spouse receiving the pension must declare it in his or her IRPF as earned income (according to Article 17.2.f) of the LIRPF).

In short, there is a logical transfer of taxation from the former spouse making the payments to the one receiving the pension. It is important to note that, since this income is not subject to withholding, the receiving former spouse will have lower income limits to be obliged to file the IRPF return (€14,000 for 2022 and €15,000 for 2023).

Real estate in common

In the case of several properties in common with your former spouse, the tax treatment agreed in the divorce agreement will vary according to each case. Regarding the family home, there will be no imputation of real estate income if it is the habitual residence of the spouse with custody of the children. If the home was acquired before 2013, the deductions for investment in habitual residence will be applied differently depending on who acquires the property or continues to pay the mortgage.

In the case of having second and subsequent properties in common:

– If the property is rented, the yields will be declared at 50%. If a divorce agreement ratified by the judge attributes all the yields of the rent to one of the spouses, only this one will declare it.

– If the property is empty and is used for the own use of both spouses, the imputation of real estate income will be 50%. If after the divorce the private use of a property is assigned to one of the spouses, only this one will declare it (Consultation V1929-17, of July 19).

Exemption for reinvestment in primary residence

The sale of a principal residence may be exempt from tax if the money obtained is reinvested in another principal residence within a period of up to 2 years. Recently, the Supreme Court established that the property transferred can be considered a primary residence, allowing the reinvestment exemption to be applied, even if one of the former spouses has not lived in it in the two years prior to the sale, provided that it has been the primary residence of the other spouse during that period (STS 553/2023, of May 5, appeal number 7851/2021).

B Law & Tax International Tax & Legal Advisors.

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