If two people qualify as partners for income tax purposes, they are able to allocate certain elements of their income and assets as they see fit. By allocating these elements wisely, they can save on tax.
Tax partnership
If you and your partner are married (or in a civil partnership), you are always considered partners for tax purposes. This applies even if you do not live together. Are you registered at the same address as someone else and have you entered into a cohabitation agreement with a solicitor? In that case, too, you qualify as partners for tax purposes.
In addition to these common forms of cohabitation, there are various other “paths” that lead to a tax partnership. You can find these, for example, on the website of the Tax Office. As you work through the steps of your online tax return, you’ll automatically find out whether you have a tax partner. However, it’s better to plan for this in advance. It could, in fact, bring you a significant benefit.
Distribution of income and wealth
Tax partners are free to allocate certain elements of their income and assets as they see fit. These elements are as follows:
- taxable income from one’s own home (the “mortgage interest relief”);
- income from a substantial interest;
- the personal allowance (for example, your study costs);
- the basics of saving and investing (for example, your bank accounts).
Imagine this: you have a substantial amount of study-related expenses, but you have no income from which to deduct these costs. In that case, your tax allowance is of little use to you at that moment. If your partner does have an income, you can allocate the tax deduction to them, which can result in an immediate tax refund. There are various scenarios in which allocating the deduction can be beneficial.
Tax deductions subject to the highest rate
In the example of study costs, you have seen that you can still benefit from a tax deduction even if you have no income of your own. Because of the progressive tax system (higher income = higher tax rate), it is generally advantageous to allocate the mortgage interest and personal allowances to the partner with the highest income.
The following rates apply to income from employment and property for 2017 (if the state pension age has not yet been reached):
Disc | Taxable income | Percentage |
1 | up to €19,982 | 36,55% |
2 | From €19,983 to €33,791 | 40,8% |
3 | From €33,792 to €67,072 | 40,8% |
4 | More than €67,072 | 52% |
If part of your income is taxed at 52%, then a tax deduction will also give you 52% of the deduction – for that part. If your income falls within the 1e disc and your partner lands in the 4e If you are on the same mortgage and you both have a tax deduction of €10,000 for the property, then allocating the full amount of the mortgage interest to your partner (rather than a 50/50 split) will save you roughly €775 extra (the difference between 52% and 36,55%, multiplied by €5,000).
Other applications of the distribution
In addition to the clever allocation of tax deductions, the following situations, for example, can also lead to a favourable outcome in terms of the total tax due:
- Arrange the distribution so that one of the partners ends up owing (at most) €45 in tax. This is known as the tax threshold; in that case, the amount does not need to be paid;
- Tax on income from savings and investments is (with effect from 2017) also calculated (progressively) using tax bands. By splitting the tax base 50/50, you ensure that you can benefit from the lower tax bands twice;
- Some tax reliefs (such as the elderly person’s tax relief) are granted up to a certain income threshold. Allocating a tax deduction to the partner with the lower income may – contrary to what is outlined above – still be a good choice if this entitles that partner to an additional tax credit.
How it works in practice
You make this allocation in one of the final steps of your digital tax return. The Tax and Customs Administration always calculates how much tax you and your partner owe together, but does not offer any advice on this. You will therefore need to work out the most favourable allocation yourself (using the tips above). Feel free to experiment with it – it’s well worth the effort!