Tax reductions/credits and withholding tax system
Newsletter - august 2018
The withholding tax system will be introduced on 1 January 2019 for most taxpayers. This measure will eliminate the current interval that exists between the moment income is received and the moment it is taxed. However, the rules specific to income tax calculation are maintained, particularly as regards the allowance for dependents and the numerous tax credits/reductions.
A time-lag maintained
Although income will be taxed as soon as it is received by the taxpayer via the withholding tax system, tax credits and reductions will continue to be received/applied with a year’s interval. This specific feature is due to the combination of two factors: firstly, the considerable number of tax reductions and credits prevent the taxation process from being automated, and secondly, the fact that income tax will continue to be declared according to the same timeframe as at present.
Therefore, households that engage expenditures granting entitlement to these tax advantages in 2019 will not declare them until spring 2020, in their 2019 income tax return. As a result, the tax administration will only be able to take them into account at the time the tax is assessed, in September 2020.
Under the new withholding tax system, taxpayers will be able to adjust the amounts withheld in the event of any change to their income and/or personal situation, in the same way as they can now. We could have imagined that a downward adjustment would therefore be possible in anticipation of tax credits and reductions. But this is not the case, since the tax administration has specified that the right to revise the amount downwards is not available for tax reductions and/or credits and/or in order to anticipate application of the zero rate provided for by Article 204 H II of the French Tax Code .
Legislation nonetheless provides for two exceptions in order to anticipate the application of tax reductions/credits:
• As regards tax credits for personal services and child care of children under 6 as well as the tax reduction granted for expenses paid for accommodation of dependents in a retirement home, a part payment will be made in January 2019, equal to 30% of the amount of the reduction or tax credit granted in 2018 and calculated on the basis of expenditures incurred in 2017. Payment of the balance or the adjustment will take place in August 2019, based on the 2018 income tax return filed in spring 2019.
• Low-income households, which were not taxable in 2017 and 2018 owing to tax reductions or credits, will see their tax rate reduced to zero if the following two cumulative conditions are met:
– the income tax enforced for the last two known years of taxation after deduction of tax reductions and credits is zero (before deduction of the CIMR tax credit for modernization of income tax collection),
– the reference tax revenue for the last known year of taxation is less than €25,000 per unit included in the dependents’ allowance.
We are entirely available if you have any further queries about the issues discussed in this newsletter or about any other accounting, tax, social security or law related topic.