In April, the Belgian 2012 tax filing season has kicked off with the first deadline for tax filing (June 28 for paper tax returns) coming up. You may wonder which tax obligations you have to meet and would like to better understand some of the basic features of the Belgian tax system. Tax payers, who are working cross border, are often confused by local tax rules in the new work location as to the tax filing obligations, related to their family situation.

A basic question relates on the tax filing status of a family. In Belgium, people who are married or who have signed (and registered) a formal co-habitation agreement, will in most cases be obliged to file a joint income tax return.

Belgium differs from many countries, which allow marriage partners to elect separate tax filing if this is to their benefit. Belgian tax filing always is joint. For resident tax payers of Belgium, this has an immediate impact on the family’s tax charges. For non resident tax payers, income, earned by one of the spouses outside Belgium may still have an impact on the calculation of the Belgian tax due.

Although tax filing is always joint, the tax calculation is separately made per partner. The calculation method, however, does not imply that there is no interference of the tax situation of one partner on the calculation of the tax for the other partner. An important factor of interference is the so-called “marriage quotient”.

The marriage quotient was introduced in 1988 and is applied when only one of the partners earns income, which is taxed at progressive rates or if one of the partners has a low income level. Through the marriage quotient, part of the taxable income of one spouse is, for tax calculation purposes only, allocated to the other spouse. The impact of the marriage quotient is a reduction of the overall tax burden for the family by shifting income, which is taxed at the highest marginal tax rates of one partner to the other partner, where it will benefit from the personal tax deduction of the partner and further be taxed at the lowest marginal rate of 25%.

One could expect the marriage quotient to always be a positive element for a family. This is obviously the case when only one of the spouses earns professional income. Some simple calculations, however, point out that the marriage quotient is detrimental in those situations, where one of the spouses only arns a limited amount of professional income, for example in case of part time employment or a small business (in Belgium or abroad) which generates only a limited income.

Two calculations (income 2011 – tax year 2012) clearly illustrate this point. We took two married couples without children and calculated the impact on the overall tax burden of the marriage partner, who earns only a small amount of taxable income. In our example, this partner earns a taxable income (after deduction of social security) of 5.000 Euro.

Family 1: the other partner earns a taxable income of 30.000 Euro.

Calculation 1: 30.000 Euro tax on 30.000 Euro: 5.333,65 Euro (marriage quotient)

Calculation 2: 35.000 Euro tax on 35.000 Euro: 6.919,83 Euro (no marr. quotient)

Tax due on 5.000 Euro of additional income: 1.586,18 Euro
Effective tax rate on income of the second partner: 31,72 %

Family 2: the other partner earns a taxable income of 50.000 Euro.

Calculation 1: 50.000 Euro tax on 50.000 Euro: 14.887,90 Euro (marriage quotient)

Calculation 2: 55.000 Euro tax on 55.000 Euro: 16.839,74 Euro (no marr. quotient)

Tax due on 5.000 Euro of additional income: 1.951,54 Euro
Effective tax rate on income of the second partner: 39,04 %

The calculation shows an effective tax burden on only 5.000 Euro of additional family income of respectively 31,72 % and 39,04%. This may imply that the Belgian tax system provides little incentive for a non working marriage partner to take up a limited professional activity.

Indeed, the little additional income earned will to a large extent be taxed away. Please note that the calculation does not include all social security, due by the family (this would make the calculation even worse). It will therefore only pay off to start a second professional activity for the family, provided that this will generate sufficient income in order to offset the loss of the marriage quotient.

The calculation also indicates that the information on the official tax calculation form is misleading. In our example, the official tax calculation will show a respective tax burden of only 7,1 % and 7,7 % on the 5.000 Euro of income of the second partner. This figure is technically correct, but does not reflect the actual financial impact of the loss of the marriage quotient by one partner and therefore does not present the actual tax increase for the family, wich is 4 to 5 times higher than the one, shown on the tax assessment.

Jan Lambrechts – ICHIBAN Consult