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Tax Treatment : Gross or Net Spousal Support Payments.

Resolved Question:

I'm paid in US funds to bank account in the US. I am not a US citizen. I work and live in the UK and file a US return for US sourced income (11 days worth in 2013) and also a UK return for the remainder of the days. My firm pays me gross amounts, but helps manage taxation by garnishing my wages (they call it hypothetical tax) and remitting on my behalf and then we settle up at the end of the year. I'm getting divorced and am trying to figure out the spousal support for my wife. I will get a US W-2 for the full amount that I am paid and then will have to remit payment to my ex-wife. Normally I would claim just a few days in the US for my work and so my taxable US income would be relatively small (11/36th's of my salary). I presume my wife would have no US source income for my question. I expect that I would pay 25% of my GROSS income, lets say it's $1m US$ per year to my wife, so $250,000 US$. I presume she would need to file her own tax return in the UK for the $250,000 (obviously converted to Sterling) and pay the appropriate tax on that amount and that I would file a UK return based on earning $750,000? First is that generally correct? Is there a line for me to deduct the $250,000 from the total income for spousal support on my UK return? I realize I haven't taken into account the monies for the 11 days I worked in the US in the latter half of this example for simplicity. How would I work that? Although I make x, after I pay her based on 25% of my gross would I pay her a net amount. Would she need to file a return in the UK (no ties with Canada anymore)? She and I would have different tax rates for example so would I have to pay at my tax rate and then give her a net amount.

Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi
Thanks for your question, I am Sam and I am one of the UK tax experts.
You cannot claim relief on the fact you will have made spousal support payments, so will still be considered for the full gross income for your tax purposes in the UK
So regardless of your tax rate (or hers) you pay her from your personal income - and the tax position on you, has no bearing at all (similar to you paying rent or utility bills, or doing a food shop)
I am not sure why you omit the 11 days of US earnings (as per 2013) as this should still be declared to the UK tax authorities - unless of course
1) This money is not remitted to the UK
2) You are taxed under the remittance basis in the UK
But if you have not this in place with HMRC - then you should be declaring your worldwide income and any foreign tax suffered.
Then, if your wife is a UK resident, then the spousal support payments you make to her are tax free, she does not suffer tax on receipt of this money
Thanks
Sam
Customer: replied 2 years ago.

I didn't omit it, I just wanted to make the example easy. I pay tax in the UK and the US and fill out both forms in compliance to the rules of those tax codes.

So as I understand it I would pay tax on $1,000,000 (£638,909) which would give me a net wage of about £349,263. I would then remit a portion of that to my wife and she would pay no taxes on it...correct?

Expert:  Sam replied 2 years ago.
Hi Robin
Thanks for your response
I see, as you advised that you file the UK tax return just to take into account the remainder of the days, this suggested that you did not include the total income position to HMRC. I am glad we cleared that up.
And yes your analysis of the situation regarding the spousal support payments as treated in the UK, is correct.
Do let me know if you have any follow up questions, on the information I have provided, and I am sorry the position is not more favourable for you, under the UK tax regime.
Thanks
Sam
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