Taxation of Maintenance Payments

I am just wondering if anyone can clarify these two points. I understand that maintenance payments between spouses are subject to income tax provided there is a legal separation agreement in place.

Assuming that one separated spouse pays most of their tax at the higher rate, am I correct that they get tax relief on legally enforceable maintenance payments at the higher rate (41%) ?

Also, assuming that maintenance payments to the lower earning spouse do not push them into the higher rate of income tax band, overall it is beneficial for maintenance to be given for the spouse rather than the children, as the "provider" gets relief at 41% and the "recipient" pays tax at 20%???

Am I correct in this?

It's hardly as straightforward as that though, is it?

Ok there may on the face of it be a tax benefit to the payer, a marginal rate deduction. But it puts a burden on the recipient that wouldn't be there if the money is classified as being maintenance for kids. This aggregate benefit also disappears if the income of the recipient changes in the future, pushing them into the high rate band (or if the tax bands, or tax rules for maintenance change).

Anyway, I presume maintenance for children is only until they reach adulthood. I'm not familiar with such agreements but if one agrees to diddle the numbers in favour of their ex, in order to get a tax benefit, couldn't they end up with a much larger bill in the long term, paying maintenance indefinitely..?

Louthman

You are correct in terms of the tax treatment - spousal maintenance is taxable/tax deductible at marginal rates and child maintenance even if under a legally enforceable agreement is not tax deductible/taxable. So your thinking is right purely from a tax perspective.

However, Mandlebrot does have a point re the wider issues which obviously needs consideration. Generally maintenance is payable up to 23 age if the child is in full time education.

Dont forget relief from any PRSI suffered on spousal maintenance can be claimed back at the end of the year also.

Cambodia

Thank you both for this advice. What I had in mind is say that child maintenance is X for Y years, then I could say pay 1/2X as child maintenance and 1/2 X as spousal support for Y years. Could you just explain further the PRSI issue? I just thought I got relief at 41% full stop.