Divorce and tax, can there be two more horrible words in one sentence? Probably yes, but this time it is divorce and tax.
Divorce and tax
Divorce and tax go hand in hand. A divorce implies you were married. If you were married you were tax partners for Dutch income tax purposes. A divorce is a very wide subject, so is tax, hence I focus on a couple of aspects I think is important.
Remaining tax partners
The tax system offers the option to remain tax partners for the full tax year during which the divorce took place. This is an important aspect you need to discuss with your ex partner.
We have had the following situation.
The husband and wife are having a divorce, a lawyer is assisting them. It is a business divorce, not a fight divorce, which is good. The husband mentioned to the lawyer that he wishes to have the wife own in full their right now 50/50 owned house. The lawyer replies: that is a gift. The wife states to the lawyer that she waives her rights to the husband pension rights. The lawyer replies: that is convenient.
Divorce, lawyers and tax
This is the moment you need to understand that a lawyer is good at civil or family law, but not tax law. If the lawyer was more aware of tax issues, he would have known that the rights on a pension are huge, much higher financial amounts are involved than the value of the house. Hence his remark, that is convenient.
The reply about the gift is not true either. Between tax partners there are no gifts. Plus, the husband had not intended to name it as a gift, for him he felt morally compelled to leave behind his ex wife well taken care off.
As long as the couple in the divorce are tax partners, the above situation can be executed without gift tax being in place. But the fiscal partnership is more wide than this example, hence we strongly recommend to use the opportunity the Dutch tax office offers to remain tax partners in the year of divorce.
The mortgage interest is tax deductible for the house that was purchased and used as main residence. In case of an upcoming divorce it is possible that one of the partners no longer uses the house as main residence. Technically one partner cannot deduct his or her part of the mortgage interest anymore. The other partner cannot simply take this deduction over.
For this situation the rules have included an article that states that in the above mentioned situation the full mortgage interest can be deducted for a maximum period of 2 years, even though not both partners are living at that address.
Alimony and mortgage interest
It does happen that the partner that remains living in the house is not able to purchase the house of the ex partner as the income for the mortgage is not high enough. The couple then decide to leave it as it is and both partner own the house and mortgage. After the mortgage is final, one partner stays behind. The other partner pays alimony. Partner alimony is tax deductible, children alimony is not. You can look at it like children always cost money, divorce or not. The incoming alimony is a taxable income. Against this income you can set off the mortgage interest. However, only 50%, as 50% of the house is owned by the person living in the house.
Divorce for tax purposes
One small silly side note. We are often suggested that a divorce solves a tax issue. Most common example. Partner goes working in Dubai. Dubai knows no tax system. Wife stays in the home they own in the Netherlands. The Dutch tax office takes the standpoint that based on article 4 of any tax treaty the husband has also remained a Dutch tax resident. The tax free Dubai income is then suddenly taxed in the Netherlands.
The suggestion is to get a divorce
Now a risky topic is touched. The husband can mirror to the wife that this is all for tax purposes only, but is it? Is this not a cheap manner to get a profitable divorce, and still run off with a partner the wife was not aware of. That is the message we update both partners of. If you decide a divorce, then treat it as a true divorce. Suddenly the divorce tactic for fiscal purposes is no longer a topic.
Tax is exciting
We think tax is exciting, some are excited about a divorce. A divorce we never think is exciting. There is always some sort of drama involved and then the tax aspects are irrelevant. Often a second wind will bring parties to the table to also address the tax aspects. We will be glad to assist with the tax return, but please do not start divorce arguments with us present. Which has happened before ofcourse.