An obligation to provide spousal support can be bought off by making a one-off payment. However, this has advantages and disadvantages. After a divorce, the highest-earning former partner often has to pay alimony. If there are also children in the family, there is a right to child support. The parent who is responsible for the child’s daily care receives child support. It is possible to buy off alimony in one go by depositing an amount with the ex-partner or with an insurer on behalf of the ex-partner. In certain cases this is an attractive way to sever financial ties, but it also has disadvantages.
Tax benefit from buying out a partner’s pension
The provider of spousal maintenance can deduct the amount paid from income as a personal deduction. The former partners can mutually agree to buy off the obligations in one go by depositing a single amount. The present value is calculated based on the monthly obligation. This amount can be transferred to the ex-partner. In that case, the one-off amount is added to the recipient’s income in the relevant year. This is not an attractive way to settle the amount for the recipient, because because the amount increases the income, part of it will probably have to be paid in tax at a higher rate. By depositing the amount with an insurer and subsequently receiving a periodic payment, the tax levy can be limited. Child support cannot be commuted.
Disadvantages of surrenders for the alimony provider?
In this way, settlement can be made in one go and financial ties can be severed. However, there may be disadvantages to paying in one go. The payer of spousal maintenance can no longer benefit from changes in the situation of his or her ex-partner. Normally, the alimony obligation would stop if the ex starts living together again or gets married, or the obligation would decrease if the ex-partner starts earning more. The government may also take measures to shorten the period for which an alimony obligation exists. There are more and more calls for shortening the period.
An additional disadvantage is that the amount to be paid off in one go must be available from the spousal maintenance provider. If the money is present, the limitation may be the deductibility of the amount. You cannot receive a refund on an amount of 50,000, while you only have income of 35,000 in the tax year. The excess can then be offset with the income in box 3 (savings and investments) and then with box 2 (taxpayers who have a substantial interest). If the personal deduction has not yet been fully deducted after settlement, the remaining amount can, for example, be settled in subsequent years
Benefit from difference in rates
A major advantage of the tax settlement of spousal maintenance is the difference in the amount of tax paid by the provider and the recipient of the alimony amount. If the provider has a high income (>55,000) and the recipient has a low income, spousal maintenance offers a tax advantage. The payment can be deducted at the high rate (52%) and then taxed again to the recipient at a lower rate (for example 33.1%).