If you want to know how to reduce your Personal Income Tax (IRPF) for this year, you are interested in reading more. Especially when we are less than a month away from the end of 2019. It is therefore the ideal time for individuals and the self-employed to review their tax obligations and plan their personal income tax returns.
Next, the experts from our Tax Consulting Department propose a series of recommendations to reduce the tax bill. In addition, we recall the main elements that must be reviewed before a tax and accounting closing.
How to reduce your Personal Income Tax (IRPF)
As we all know, IRPF is the personal income tax.
Here are some ideas still in time to be applied.
Contribution to Pension Plans, Mutual Social Welfare, Insured Welfare Plan and private insurance.
Contribution to social welfare systems reduces the General Taxable Base of Personal Income Tax. With the limit of the lowest amount between:
- 8,000€ per annum (and 5,000€ per annum for group dependency insurance premiums paid by the company).
- or 30% of the sum of the net income from work and economic activities received individually in the financial year.
It is also possible to obtain a reduction in the General Tax Base of up to 2,500€ for contributions to the spouse’s social security systems. Provided that you do not obtain income from work or economic activities. Or obtain them in an amount less than 8,000€ per year.
In case of impossibility of reduction by insufficiency of quota it will be able to be reduced in the 5 following exercises.
Contribution to Protected Assets of Persons with Disabilities.
It is also possible to make contributions to pension plans in favour of persons with a physical disability equal to or greater than 65%. Or psychic equal to or greater than 33%. If the person making the contribution has a relationship or guardianship with the disabled person, the reduction will have a limit of 10,000€ per year. However, if the person making these contributions is the disabled person, the reduction may not exceed 24,250€.
Rescue of the Pension Plan.
It should be remembered that the Pension Plan can be redeemed in the form of monthly income, capital or in mixed form, as appropriate. Taxed in any of these cases as income from work. If the redemption in the form of capital is of interest, a 40% reduction is possible on the contributions made up to 31 December 2006. However, those who retired in 2011 or 2017 should be reminded that the deadline for applying the reduction ends on 31 December 2019.
Property rental expenses.
Taxpayers who rent real estate and foresee an income tax of 2019 should consider the option of anticipating, before the end of the year, those expenses (such as repairs) that they had planned to make. These additional expenses will lead to a reduction in the returns on which to tax along with other typical expenses. Such as interest and financing expenses, community expenses, amortization of the property, the IBI, the rubbish rate, doubtful collection balances, etc.
Donations to NGOs and contributions to political parties.
Donations to non-profit organisations governed by Law 49/2002 allow 75% of the first 150€ to be deducted from the personal income tax and 30% from the rest. Or 35% if the donation to the same entity is equal to or greater than that of the two previous years.
In the case of donations to foundations and associations excluded from the system of Law 49/2002, 10% of the amounts donated may be deducted.
The membership fees of political parties, federations, coalitions and groups of voters are also deductible by 20%, with the maximum limit on the deductible basis of 600€ per year.
Compensation of profits with losses.
If in 2019 capital gains have been obtained (from the sale of real estate or shares with profits), this capital gain will be taxed in the IRPF Savings Base as follows:
- the first 6,000€ at 19%.
- the following 44,000€ at 21%.
- and the rest at 23%.
However, it is possible to “offset” this capital gain and avoid its taxation if there are capital losses (from the sale of real estate or shares at a loss, etc.) from the 4 previous years that could not yet be applied to personal income tax. And with patrimonial losses produced during the financial year 2019 itself. The remaining amount may be compensated in the following 4 years.
In addition, it is also possible to offset these capital gains and losses with the capital gains received. Dividends, interest, etc., up to a limit of 25% of the positive balance of the income to be compensated.
In conclusion, if dividends have been received, or if a capital gain has been obtained through the transfer of shares or real estate, it is interesting to assess whether it is time to dispose of those shares or products that are going to cause us losses, in order to reduce the tax impact of the gains.
Investment in start-ups
It is possible to deduct 30% of the investment made to support and finance the entrepreneurship of new companies. With a maximum deduction base of 60,000€ per year. However, this deduction requires certain conditions:
- the own funds of the new company may not exceed 400,000€
- investment must be made at the time of incorporation or in the following three financial years
- the investment must be maintained for more than 3 years but not more than 12 years
- and the investor cannot own more than 40% of the share capital.
Tax benefits for over 65s
In accordance with article 33.4 b) of Law 35/2006 on Personal Income Tax, no tax will be levied on the capital gain obtained from the transfer of the habitual residence of the taxpayer who is over 65 years of age or in a situation of severe dependency or heavy dependency. And this without the need to reinvest the amount obtained in the purchase of a new home. This is required in all other cases in order to exempt the profit. A habitual residence is considered to be one in which the taxpayer has resided for a period of three years as an owner. Therefore, if there is provision for the transfer of the habitual residence, it is advisable to wait until this age has been exceeded in order to avoid taxation. And, in the case of housing in community of property, both must surpass this age.
If, what is transferred is not the habitual residence but any other patrimonial element, the gain could be exempt if the amount obtained in the transfer is reinvested, within 6 months, in the constitution of an annuity that would complement the pension. But with the maximum limit of 240,000€ as an amount that can be used for this purpose.
Self-employed: Deduction for investments affecting economic activities and Reduction for commencement of activity.
IRPF taxpayers who carry out economic activities should be reminded that they will be able to deduct up to 5% of the amount they decide to reinvest in new tangible fixed assets or real estate investments that are related to their activity. The deduction percentage will be 2.5% if the Reduction for commencement of activity of 20% on the positive return to which one is entitled in the first year with profits and in the following year is applied simultaneously.
Modules Regime
Finally, the self-employed who pay taxes under the Objective Estimation Regime or “Modules” must check that the limits that exclude it have not been exceeded. That will finally continue at 250,000€ and will not fall to 150,000€ as expected.
We must remember that the limits are 150,000€ of full returns invoiced for all economic activities. Except agriculture, livestock and forestry. But for operations where there is an obligation to issue an invoice when the recipient is a businessman, the limit is 75,000€. And, for purchases of goods and services, 150,000€ (excluding VAT).
However, in a transitory manner since 2016, the thirty-second transitory provision in Law 35/2006 on Personal Income Tax increases maintains the following limits in force, which will continue to be in force:
Sales: 250,000€ (125,000€, if the recipient is an entrepreneur.)
Purchases: 250,000€.
There are many possibilities, just have to make some calculations and the corresponding forecast, but without leaving it for the last day.
Arrabe Integra
Tax Consulting