Orphan’s pensions are a financial benefit that Social Security gives to children who have lost one or both parents, which is why it is vital help for many families. Although it is a benefit that seeks to financially protect descendants, when it comes to reporting to the Tax Agency, doubts arise about whether this money is considered another income and, therefore, must be declared to the Treasury, or if, on the contrary, it is exempt from taxation.
According to article 17 of the Personal Income Tax Law (consultable in this Official State Gazette), pensions and liabilities received from public Social Security schemes are considered income from work. This means that, on paper and as a basic rule, these benefits have the same nature as a salary and should be taxed in the Income Tax return (IRPF).
Now, the fiscal reality is kinder in this sense thanks to the exemptions contemplated by the regulations themselves to protect the most vulnerable groups. It is article 7 of the law that acts as a tax shield and explains that these incomes are exempt from taxation, that is, they should not be declared.
In the specific case of this aid, article 7.h explains that pensions and passive orphanhood benefits received from public Social Security schemes and passive classes are exempt. However, this article also groups other beneficiaries (grandchildren and siblings) for whom the exemption does have fine print.
When does the exemption apply and when does it have to be paid?
The Tax Agency sets a very clear limit to stop paying taxes in certain cases. The exemption applies only to beneficiary grandchildren and siblings if they are under 22 years of age. This means that, for the orphan, the money enters in full without tax regardless of his or her age, but for the rest of the assimilated beneficiaries, age is decisive.
The scenario changes for the latter when said age is exceeded. Once over 22 years of age, if the benefit continues to be collected, it loses its tax exemption and becomes taxed as another income from work, adding to the rest of the income that the taxpayer may have.
Even so, the law provides an important exception to this age rule. The same article specifies that the exemption is maintained, regardless of the beneficiary’s age, if he or she is incapable of all work.