This is a translation of the Japanese original. The Japanese version is authoritative; figures follow Japanese tax law.
Money that changes hands on divorce divides cleanly into what is taxed and what is not. Property division can create capital gains for the person handing the asset over (and for a home divided after the divorce, the 30 million yen special deduction is available), while the person receiving it pays no gift tax. Child support and compensation for emotional distress are tax free. One more thing that gets overlooked is the date of the divorce: the spousal deduction, the dependent deduction and the single-parent deduction are all judged by your situation on 31 December, so divorcing in December rather than in January changes the tax. A husband on 6 million yen a year who divorces his homemaker wife inside the year loses the spousal deduction and pays about 71,000 yen more, while the wife who takes the child and earns 2.5 million yen pays about 47,500 yen less thanks to the single-parent deduction. This article sorts out the tax by type of money, compares divorcing inside the year with divorcing after it, and works out which parent takes the child's dependent deduction, using National Tax Agency materials.
The short answer: money and tax on divorce at a glance
| Money | The person receiving | The person handing over |
|---|---|---|
| Property division (savings and cash) | No gift tax (unless the amount is excessive, or the divorce was arranged to escape tax) | No tax |
| Property division (the home or other real estate) | No gift tax. Registration and licence tax (2% of the assessed value) does apply. Real property acquisition tax is generally not imposed where the purpose is settling the couple's shared property (check with the prefecture) | Capital gains tax (treated as a sale at the market value on the date of the division). For a home, the 30 million yen special deduction is available if the division takes place after the divorce |
| Child support (monthly) | Tax free | No deduction (though the child's dependent deduction may still be available) |
| Child support (a lump sum of several million yen) | May be subject to gift tax (a trust or similar arrangement can avoid this) | — |
| Compensation for emotional distress | Tax free (for an amount reasonable by ordinary standards) | No tax if paid in cash. Paying in real estate creates capital gains |
| Pension splitting | Received later as pension (taxed as pension income) | Your own pension is reduced |
| Splitting the surrender value of a life insurance policy | No gift tax (it is property division) | Cancelling the policy may create occasional income |
Sources: National Tax Agency, Tax Answer No.4414 "When you receive property on divorce" [NTA], No.3114 "When you hand over land or a building on divorce" [NTA]
The National Tax Agency states that "where you receive property from the other party as a result of a divorce, gift tax is not normally charged", with two exceptions: "where the amount of the property divided is excessive even after taking into account the property built up through the cooperation of the couple during the marriage and all other circumstances", and "where the divorce is found to have been carried out in order to escape gift tax or inheritance tax".
Divorcing in December or in January: the test date is 31 December
The spousal deduction, the dependent deduction and the single-parent deduction are judged by your situation on 31 December of that year. File the divorce notification on 30 December and the whole year is calculated as "no spouse, single parent"; file it on 2 January and that year is calculated as "married".
| Divorce inside the year (by 31 December) | Divorce after the year turns (1 January or later) | |
|---|---|---|
| Spousal deduction and special spousal deduction (the higher earner) | Not available | Available for that year (gone from the following year) |
| Single-parent deduction of 350,000 yen (the parent who takes the child; income of 5 million yen or less) | Available from that year | From the following year |
| The child's dependent deduction (a child aged 16 or over) | One parent or the other takes it (see below) | The same as before the divorce (normally the higher earner) |
| Resident tax exemption test (a single parent is exempt at 1.35 million yen or less of prior-year income) | Applies from the following fiscal year | From the year after that |
Example: a husband on 6 million yen a year (a 20% tax rate) and a homemaker wife, with one child aged 10. The wife takes the child and works for 2.5 million yen a year after the divorce
Husband: divorcing inside the year removes the spousal deduction of 380,000 yen (330,000 yen for resident tax), so 38,000 yen of income tax plus 33,000 yen of resident tax, or about 71,000 yen more tax. Divorcing after the year turns leaves that year unchanged
Wife: divorcing inside the year brings the single-parent deduction of 350,000 yen (300,000 yen for resident tax), so 17,500 yen of income tax plus 30,000 yen of resident tax, or about 47,500 yen less tax. From the following year she is also better placed on the resident tax exemption test
For the two of them together, divorcing inside the year costs about 23,500 yen more, but the increase falls on the husband and the decrease on the wife
If the divorce comes after the year-end adjustment, the company can redo that adjustment up to 31 January of the following year. If there is not enough time, you correct it yourself in a tax return (an amended return for the person dropping the spousal deduction, a refund claim for the person adding the single-parent deduction). For the requirements of the single-parent deduction, see the single-parent deduction and the disability deduction.
Which parent takes the child's dependent deduction: the parent paying child support can qualify too
The dependent deduction for a child aged 16 or over (380,000 yen, or 630,000 yen for a child aged 19 to 22) is for a relative with whom you "share a livelihood". A National Tax Agency Q&A case states that where child support is paid after a divorce in performance of the duty of support, limited to a set age such as "until the child reaches adulthood", the child may as a rule be treated as sharing a livelihood for that period and so be eligible for the dependent deduction[NTA]. In other words, both the father who does not live with the child but pays child support and the mother who lives with the child can meet the requirement.
- Only one of them can take it. The same child cannot be claimed by two people. If both claim, the tax office will query it, and if no agreement is reached, in practice the person who filed first (who entered the child on the dependent deduction declaration form at the year-end adjustment) prevails.
- Letting the one on the higher tax rate take it reduces the tax paid between them. After a divorce, though, they are no longer one household, so this becomes something to negotiate along with the amount of child support. If the mother wants to qualify for resident tax exemption, the number of dependants affects the exemption threshold, so it can be better for her to take it.
- There is no income tax dependent deduction for a child under 16. The child still counts towards the number of dependants when the resident tax exemption threshold is worked out, so enter the child on the dependent deduction declaration form.
- The parent paying child support cannot take the single-parent deduction. The "child sharing a livelihood" for the single-parent deduction must have total income of 480,000 yen or less and must not be the dependent spouse or dependent relative of anyone else. Only the parent who takes the child qualifies.
The Child Rearing Allowance is a separate system from tax and is judged on the income of the parent who takes the child. Note that 80% of the child support received is added to that income. For details, see the Child Rearing Allowance status report.
Dividing the family home: hand it over "after" the divorce and the 30 million yen deduction applies
Where land or a building is handed over as property division, the National Tax Agency states that "capital gains tax is charged on the person who divided the property" and that "the market value of the land, building and so on at the time of the division becomes the proceeds for capital gains purposes"[NTA]. If the property has risen in value since it was bought, the person handing it over owes capital gains tax.
- Divide it after the divorce is final. The 30 million yen special deduction for a residence cannot be used for "a transfer to someone in a special relationship, such as a spouse", but a former spouse after the divorce is final is not in a special relationship, so the deduction is available if the home is divided after the divorce. Transferring the title before the divorce notification is treated as a gift (with the gift tax spousal exemption of 20 million yen where the marriage has lasted 20 years or more), and the 30 million yen deduction is unavailable.
- For the person receiving, the acquisition date and cost become "the market value at the time of the division". Capital gains on a future sale are calculated using that market value as the acquisition cost.
- Where a mortgage is still outstanding. Transferring the title does not change who owes the loan, so the bank's consent and a possible refinancing have to be considered. Whether the person taking over the loan can claim the mortgage deduction afresh depends on whether the requirements (living in the home, the purpose of the borrowing) are met.
For the requirements and procedure of the 30 million yen deduction, see the 30 million yen special deduction on selling your home. Money at divorce as a whole (pension splitting, the going rate for compensation, the procedures) is covered in money and tax at divorce.
What to do in the year you divorce
- Tell your employer (correct the dependent deduction declaration form). Report the change of spouse and dependants to the company before the year-end adjustment. Forgetting to remove a former spouse means back tax the following year and a redone year-end adjustment for the company.
- Health insurance and pension. Anyone who was a dependant loses that status, so switch to National Health Insurance and the National Pension (within 14 days) or join the social insurance at a new job. Pension splitting has to be filed with a pension office within two years of the divorce (for an agreed split, the share is fixed in a notarised deed or similar).
- Tax return. Anyone who handed over real estate as property division files a capital gains return the following year (a return is required even when the 30 million yen deduction is claimed). Anyone who could not have the single-parent deduction applied at the year-end adjustment files a refund claim.
- Resident tax filing and exemption. If the parent who takes the child had prior-year income of 1.35 million yen or less, they are exempt from resident tax as a single parent. Municipal benefits and fee reductions follow the same exemption test.
Summary
- In principle, no tax applies to the recipient of a property settlement, monthly child support, or a settlement payment.
- The spouse who transfers the family home as a property settlement may face capital gains tax. Transferring it after the divorce is finalized allows use of the ¥30 million special deduction.
- The spousal deduction, dependent deduction, and single-parent deduction are all judged based on your status as of December 31, so the tax amount differs depending on whether the divorce happens this year or next.
- For a husband earning ¥6 million a year, divorcing within the year raises his tax by about ¥71,000, while a wife who takes custody of the child gets a tax cut of about ¥47,500 through the single-parent deduction.
- For a child age 16 or older, the dependent deduction can also apply to the parent paying child support, but only one parent can claim it.
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This article is based on the materials below. The tax treatment of property division changes with the type and value of the assets, so where real estate is involved, consult a tax accountant.
Note: this article is general information. The figures are estimates and vary with your income and deductions. For an individual decision, check with a tax office or a tax accountant.