Income tax is imposed on the income of individuals and partners in a partnership. While worldwide income is subject to taxation in the case of unlimited tax liability it means that taxation is based solely on domestic-source income within the meaning of section 49 of the Income Tax Act. Accordingly, a range of personal and family-related tax benefits (such as income splitting for spouses, the basic personal allowance and relief for certain special expenses or extraordinary financial burdens) cannot be taken into account, or may only be taken into account to a limited extent, when assessing a person for the purposes of limited income tax liability.
On certain types of income the tax is generally collected by being withheld from earnings, for example, wages tax, withholding tax on income from capital, final withholding tax, withholding taxes on the income of non-residents).
Income from the following sources is subject to income tax:
- Agriculture and forestry
- Commercial business activity
- Capital assets
- Renting and leasing
Other income designated in section 22 of the Income Tax Act (e.g., income from statutory pensions or income from private sales transactions)
If a capital increase cannot be attributed to any of these types of income, for example, because the increase was incurred through a gift, the sale of objects of everyday use, or a lottery win, it is not liable for income tax. Expenses related to such income cannot, however, be taken into account for tax purposes.
In the case of agriculture and forestry, commercial business activity and self-employment, the profit is classed as the income. Profits are computed on an accrual basis, as the excess of business receipts over business expenditure or, in the case of smaller agricultural undertakings, on the basis of average rates. Business expenditure is such expenditure as is occasioned by the operation of a business or the performance of an activity on a self-employed basis. To determine earnings in the case of other sources of income, the expenses incurred to realise, protect or preserve gross income (income-related expenses) are deducted from the total receipts for a particular source of income.
Normal living expenses, which invariably include, expenditure on food, clothing and housing, are not deductible as business or income-related expenses. This also applies to expenses occasioned by the business or social position of the taxpayer, even if such expenses are incurred in the promotion of his or her business or professional career.
Total income is calculated as the balance of profits/surpluses and losses from the different sources of earnings. Losses from one source/ area of earnings may be offset against earnings from the same category or from a different source. Special rules restricting offsetting and loss deduction apply.
If losses cannot be offset during a tax assessment period, usually the calendar year, the loss is carried forward or back accordingly.
From the resulting total income, taxpayers over the age of 64 may, under certain conditions, deduct an amount of up to €1,900 annually as old-age relief. Taxpayers who are single and have children may deduct €1,308 as relief for single parents.
The relief for single parents was introduced with effect from the start of the 2004 calendar year. To be eligible for the relief, the taxpayer’s household must include at least one child who is registered as living there, and the taxpayer must be entitled to claim tax-free child allowance or child benefit for that child. The relief is reduced by one twelfth for each month in which these conditions are not met.
The figure left over is referred to as adjusted gross income.
After applying the deduction of losses (either a loss carry forward spread over time or a loss carry back that is limited in terms of amount), which is subject to the same restrictions as those for offsetting losses, taxable income is computed by deducting special expenses and extraordinary financial burdens from the adjusted gross income.
Expenditures/ special expenses
Certain expenditures detailed in the law may be deducted from adjusted gross income as special expenses, provided they are neither business expenses nor income-related expenses. They may be deducted in full, for example, church tax paid, or deducted up to maximum amounts, with such expenditures including:
- Provident expenses (premiums on insurance policies of this type)
- Expenditure on vocational training
- School fees
- Expenditures on supplementary pension plans
A lump-sum allowance of €36 for individual filers and €72 for joint filers is deducted as special expenses unless taxpayers can show that their fully deductible special expenses are higher.
With regard to expenses of a provident nature, a distinction is made between contributions towards basic old-age provision, contributions towards basic health and long-term care insurance, and other provident expenses.
Contributions towards basic old-age provision are:
- Contributions to the statutory pension system
- Contributions to agricultural pension funds
- Contributions to the pension schemes for the free professions which provide benefits comparable to the statutory pension system
- Contributions to private certified basic pensions (Rürup pensions) in which the accrued entitlements to future pension payments cannot be used as collateral, bequeathed, transferred, sold or capitalised. These pensions may be paid out only in the form of a monthly annuity for life and may not be paid before the age of 60 (or before the age of 62 in the case of contracts concluded after 31 December 2011). Additional insurance cover may be taken out for surviving dependents or occupational disability/reduced earnings capacity.
- Contributions towards an occupational pension if the pension commitment is based on a certified basic pension agreement
All contributions towards basic old-age provision, including any contributions paid by the employer in the case of taxpayers who are compulsorily insured under the statutory pension insurance system, are, in principle, deductible as special expenses up to a maximum of €20,000.
For 2013, 76% of contributions up to this €20,000 maximum was deductible as special expenses. This deductible contribution rises by 2% each year until 2025, when it reaches 100% of the €20,000 threshold. The threshold is doubled to €40,000 for joint filers.
A separate maximum amount applies for the other social security contributions including, health, long-term care and unemployment insurance and other provident expenses such as, private liability insurance and private term insurance. Taxpayers who do not have to pay the full amount of their health insurance themselves may deduct a maximum amount of €1,900, people who belong to this group include workers, salaried employees, persons entitled to allowances to cover medical costs and pensioners. All other taxpayers – such as self- employed persons who pay for their health insurance from their taxed income may deduct a maximum of €2,800.
Spouses who are assessed jointly may each claim the allowance individually. Taxpayers’ contributions towards basic health cover and statutory long-term care insurance are, however, fully deductible. There is no maximum amount. If the contributions to basic health insurance and statutory long-term care insurance themselves exceed the maximum amount for other provident expenses mentioned above (€1,900/€2,800), the contributions to the basic insurance are still deductible in full. This means that other provident expenses may not be deducted.
If the taxpayer received a wage, a flat-rate allowance for provident expenses will be applied via the system for deducting wages tax Assessment for income tax takes only the amounts actually paid by the taxpayer into account.
For children under 14 years of age and children who are unable to support themselves because of a physical, mental or psychological disability that arose before their 25th birthday, two thirds and no more than €4,000 of documented childcare expenses may be deducted per child as special expenses.
Maintenance payments of up to €13,805 to divorced or permanently separated spouses may be deducted annually. These are classed as special expenses. The amount the payer of maintenance pays towards the basic health and statutory long-term care insurance of the divorced or permanently separated spouse increases that limit. For the recipient, the maintenance payments count as other income and, as such, are subject to income tax of the same amount. This is referred to as limited real splitting. The payer must apply to obtain the deduction. The application requires the recipient’s consent.
If the recipient refuses to consent, the maintenance payments may be claimed as an extraordinary financial burden under certain conditions. In this instance, the deductible amount is limited to €8,004 (plus the contributions to basic health and statutory long-term care insurance that are made for the recipient).
Donations, gifts and membership contributions, serving public- benefit, charitable or religious purposes (tax-privileged purposes) and donations to political parties may also be taken into account as special expenses. There is a wide range of public-benefit purposes including the promotion of sports, education, nature conservation or development cooperation.
Donations to promote public-benefit purposes are generally deductible up to the amount of 20% of adjusted gross income or up to four tenths of a percent of the total turnover and the wages and salaries paid in a calendar year. Donations to political parties and independent electoral associations attract tax relief under section 34g of the Income Tax Act of 50% of these expenses, but not exceeding €825 for individual filers and €1,650 for joint filers. Donations to political parties that do not attract tax relief under section 34g of the Income Tax Act may additionally be deducted as special expenses up to a maximum €1,650 for individual filers and €3,300 for joint filers.
Expenditure for the support and occupational training of children is taken into account in the family benefits system by the provision of the tax-free child allowance and the allowances covering childcare, child minding and education for a child. This satisfies the constitutional principle under which families must be given tax exemption equivalent to the pertinent subsistence income and the childcare, child minding and educational needs of a child. To the extent not required for this purpose, child benefit serves to promote the family. In the case of a married couple subject to unlimited tax liability that live together, the stated tax-free allowances for children are doubled.
In the case of a married couple subject to unlimited tax liability who do not live together, child benefit is granted primarily to the parent that has care of the child. Each parent is granted the tax-free child allowance and the allowance for childcare, child minding and educational needs. This is then set off in each case against half of the child benefit. However, one parent may receive the tax-free child allowance for the other parent if the former essentially fulfils the obligation to support the child for the calendar year and the latter fails to do so. This also leads to the transfer of the childcare, child minding and educational needs allowance. Other than the requirements for the transfer of the child allowance, one parent may apply for the transfer of the other parent’s allowance for childcare, child minding and education if the minor child is not registered, as living with that parent and that parent does not contribute any maintenance.
Extraordinary financial burdens of a general nature are deductible where taxpayers are forced, for legal, moral or factual reasons, to incur expenditure, for example as a result of ill health, insofar as such expenditure exceeds the burden they may reasonably be expected to bear themselves. This is scaled according to income and family status.
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