Tax deductions at the lower rate

In the Coalition agreement The Rutte III Cabinet has announced a flat tax for income tax in box 1. However, this will be accompanied by an increased rate for income above roughly €68,500.

Flat-rate tax

Income up to €68,500 is taxed at a rate of 36.93%. For income above €68,500, the rate is 49.5%. These rates include social security contributions. It is not yet clear how the fact that those entitled to the state pension (AOW) pay lower contributions will be taken into account.

We’ll explain how this rate works using a simple example.
A taxpayer (with no tax partner) earns a salary of €95,000. He owns his own home, on which he pays €10,000 in interest each year, and he makes a regular donation of €1,000 to the hockey club.

Income in Box 1 is then as follows:

Income tax is calculated on the basis of income:

Deductions

Tax deductions are now only applied at the lower rate. In the Coalition agreement Examples of these tax deductions include the self-employed person’s allowance and the mortgage interest deduction.

However, answers to parliamentary questions indicate that this will involve all tax deductions:

• the business facilities:
  • self-employed person’s allowance;
  • research and development work;
  • employee tax relief;
  • start-up allowance in the event of incapacity for work;
  • SME profit exemption;
• own home:
  • interest on debts;
  • costs of borrowing;
  • periodic payments for ground rent, building lease and encumbrance;
  • deductible costs relating to the residual debt on a sold owner-occupied home;
• personal allowance:
  • expenditure on maintenance obligations (including spousal maintenance);
  • weekend activities for people with disabilities;
  • training costs;
  • expenditure on listed buildings;
  • written-off venture capital;
  • tax-deductible donations;
  • expenditure on specific healthcare costs;
  • remaining personal allowance from previous years;
• Other:
  • exemption from the obligation to make available.

Taking this example a step further, the following shows the net tax payable:

Anticipate

It makes quite a difference whether a tax deduction is claimed at the current highest rate of 52% or at the future flat-rate tariff of 36,93%. That’s reason enough to check – or have someone check – whether you can bring forward your tax deductions. The new flat-rate tax is expected to come into force on 1 January 2019. So you still have a whole year to assess the options – or have them assessed. Naturally, all relevant laws and regulations must be taken into account.

Suppose you pay your ex-partner €35,000 a year in maintenance. You had reckoned that you could deduct this amount at a rate of 52%. That gave you a tax benefit of 52% * €35,000 = €18,200. From 2019 onwards, this will be reduced to: 36.93% * €35,000 = €12,925.
You can settle your maintenance obligation in 2018. But will your income be high enough to benefit from the full tax deduction? And does your ex-partner agree to this? If so, he or she will pay income tax on the lump-sum payment in 2018, largely at the rate of 52%.
Or is the change in tax legislation a reason to ask the court to reduce the gross maintenance payments?

Transitional arrangement

Incidentally, the phasing out will take place in four annual stages of (approximately) 3% points. So it will not be until 2022 that we reach the level where the deduction is applied at the flat-rate tax rate.
Assuming, of course, that the legislation is introduced as set out in the Coalition Agreement. After all, the House of Representatives and the Senate still have to approve it.