Near the end of the year, it is time to analyse what can be done to take some tax decisions to reduce the income tax bill for the current year 2022.
Without approving any major changes in Personal Income Tax with respect to the previous year, we would like to highlight, among the options offered by the regulations, the following alternatives available to us in order to mitigate our tax burden:
- EPSV contributions.
- Deduction for the purchase or rental of a principal residence.
- Donations.
- Offsetting capital gains against latent losses.
The income tax regulations include a series of measures related to the promotion of saving for retirement that can help to reduce the personal income tax bill:
1.- Contributions to pension plans / EPSVs:
Contributions to social welfare systems (pension plans or EPSV) help to mitigate the tax bill as they reduce the tax base.
With regard to reductions in the tax base for contributions to social welfare systems (EPSV or pension plans) by taxpayers resident in the Basque Country, the quantitative limits for reducible contributions are 5,000 euros in general and 8,000 euros for company contributions, with a joint limit for both of them of 12,000 euros.
In addition to the above reduction, taxpayers whose spouse does not obtain income from work or economic activities, or obtains less than 8,000 euros, may reduce their taxable income by the contributions made during the year to their spouse’s pension plan, up to a limit of 2,500 euros per year.
If you are considering the possibility of redeeming the EPSV or the Pension Plan, it should be borne in mind that the benefits are taxed as earned income in the general tax base at the marginal rate, with a 40% reduction when received in the form of capital (lump sum).
On the other hand, if it is surrendered in the form of an annuity, no reduction will be applied to the amounts received.
Consequently, calculations should be made before redemption to decide what is most appropriate, avoiding accumulating taxable income to mitigate the progressivity of the general income tax rate, thus avoiding rate increases due to jumps in the tax bracket.
2. Long-term savings plans (PALP):
With the aim of promoting savings and similar to the regulations in the Common Territory, Long-Term Savings Plans (PALP) were created in the Foral Territories.
Unlike contributions made to pension plans or EPSVs, which are deductible from the tax base up to certain limits (see previous section), contributions made to a PALP are not deductible; however, the benefit is that the income from the PALP is exempt from personal income tax, provided that the resulting capital is not withdrawn before the end of a period of five years from its opening.
Only one PALP may be held at the same time.
5,000 per annum in any financial year and the insurance or credit institution must guarantee that at least 85% of the premiums or contributions will be received on maturity.
Moreover, there is no legal incompatibility whatsoever to be holders, simultaneously, of one (or several) Pension Plans or EPSVs and of a PALP.
3. Transfers of assests carried out by persons over 65 years of age:
The capital gain generated, with a maximum limit of 400,000 euros of gain, on the transfer of the main residence of a taxpayer over 65 years of age, will be exempt from taxation, without the need for reinvestment.
However, if the property is shared with a spouse who has not yet reached this age, it is advisable to wait until he or she reaches this age so as not to be taxed on 50% of the capital gain.
Similarly, gains obtained by the over 65s from the sale of any other asset or element of their assets are exempt from taxation, provided that the total amount, up to a maximum limit of 240,000 euros, is used to constitute an assured life annuity within a period of six months.
4. European Long-Term Investment Funds (ELTIFs):
In order to promote citizen participation in the financing of technological innovation and business capitalisation projects for the development of economic activity, from the financial year 2018, tax incentives are established in Bizkaia and Araba in Income, Inheritance and Gift and Wealth taxes for participants in those ELTIFs that meet certain requirements.
In this respect, for personal income tax purposes, investment in these funds allows a 15% deduction of the amount contributed from the taxable base of the personal income tax, up to 5,000 euros, and the investment must be maintained for at least five years.
Measures related to the ownership or rental of housing
A. Housing account:
Provided that the tax credit has not been exhausted, a deduction of 18% may be applied, with a limit of 8,500 euros of base, of the amounts deposited in credit institutions through accounts that meet the requirements of formalisation and disposal established by regulation, provided that the amounts that have generated the right to the deduction are used, before the expiry of 6 years from the date of opening the account, for the acquisition or rehabilitation of the main residence.
B. Deduction for the purchase of a principal residence:
As far as possible, if you have a tax credit, and in accordance with the limits set out below, it is worth making an additional contribution to repay the mortgage before the end of 2022.
Taxpayers may apply a deduction of 18% of the amounts invested in the acquisition and financing of their main residence. The maximum annual deduction limits for the purchase of a primary residence, in general, are €1,530 per taxpayer (which is equivalent to a maximum principal repayment and interest payment of €8,500 per person); while large families and young people under 30 years of age can deduct, if the aforementioned €8,500 is paid, a maximum of €1,955 per taxpayer (23% of the amounts paid).
Disabled taxpayers from Alava, as well as those whose habitual residence is in a municipality of Alava with less than 4,000 inhabitants, will be entitled to an increased deduction percentage.
C. Rent payments for the usual residence:
Taxpayers who pay rent for their main residence during the period 2022 will be able to apply a deduction of 20% of the amounts paid, with a deduction limit of 1,600 euros per year.
In addition, in the case of taxpayers who are members of a large family, the deduction will be 25%, with a limit of 2,000 euros per year, and in the case of taxpayers under 30 years of age, the deduction will be 30%, with a limit of 2,400 euros per year.
D. Deduction for investments for the supply of solar electricity in the main residence (Gipuzkoa):
Taxpayers in Gipuzkoa will be able to apply a deduction of 15% of the amounts paid in the tax period, with a limit of 3,000 euros, in the tax period and successive tax periods for the acquisition of the following items:
a) Complete equipment defined in the Order of the corresponding Department of the Basque Government approving the Basque List of Clean Technologies, provided that it is equipment suitable for the production of photovoltaic solar electric energy.
b) Shares, participations or any other instruments that involve participation in the equity of entities as a partner, shareholder, associate, participant or similar, of entities whose corporate purpose consists mainly in the execution of projects that seek to make more efficient use of energy sources by making the investments referred to in point a) above.
Other deductions
Deduction for investment in micro, small or medium-sized enterprises of new or recent creation, innovative, economic silver:
A general deduction of 25% is introduced for taxpayers in Alava and Bizkaia for investments made in micro, small and medium-sized enterprises, as well as 35% in the case of the subscription or acquisition of shares or holdings in innovative companies or those whose corporate purpose is directly linked to the silver economy.
The limit is set at 20% of the taxpayer’s net taxable income, and the same funds may not be deductible in more than one person or entity.
In order to apply the deduction, additional requirements have to be fulfilled, which relate to the type of share to be acquired and the holding period.
Taxpayers in Gipuzkoa, for their part, maintain their deductions: investment in new or recently created companies, deduction for financing entities with high growth potential and deduction for the incorporation of entities by employees.
Deduction for hiring personal assistans for people with a certain degree of dependencyor disability:
For taxpayers in Alava, a new deduction has been introduced, compatible both with the deduction for ascendants and with the deduction for dependency or disability, which may be applied by those taxpayers who, at the date of accrual of the tax, are in receipt of the financial benefit for personal assistance, when they hire personal assistants.
The amount of the deduction is established according to their situation of dependency or disability and the need for help from a third person.
Other measures
A. Compensation of rents:
The end of the year is a good time to do the maths and offset losses from the sale of an investment fund, disposal of real estate, shares/equity or financial derivatives against other capital gains made during 2022.
If you had capital gains in 2022 from the transfer of assets, you can reduce your personal income tax cost by transferring other assets in which you have latent losses, by subtracting the losses from the gains.
Otherwise, having realised capital losses, you can take advantage of the opportunity to reduce the taxation of any gains you may generate before the end of the year by transferring assets in which you have capital gains.
In the event of having had a negative balance in a previous year as a result of the transfer of assets and that no more than four years have passed since it was generated, it is advisable to generate capital gains before the end of the year, in order to minimise taxation by offsetting the negative balances.
However, restrictions on income compensation are maintained.
In this respect, with regard to income from movable capital, for its calculation, it is added, exclusively, by integrating and offsetting the income from movable capital that constitutes savings income. In the event of a negative net balance, its amount will be offset, exclusively and to the maximum possible extent, against the positive net balances of this type of income determined in the following four years.
With regard to capital gains and losses, the balance will be the result of integrating and offsetting the capital gains and losses deriving from the transfer of assets. If the net result is negative, its amount shall be offset exclusively, and to the maximum possible extent, with the positive net balances of this same type of income determined in the following four years.
B. Donations:
The possibility of deducting contributions to non-profit foundations, NGOs, political parties, trade unions, professional associations, etc., should be considered before the end of the 2022 tax year when filing the tax return.
In the Foral Territories, a percentage deduction is established from the general IRPF gross income tax liability and another increased one, for cases in which the entity is considered a patronage priority; in this second case, the limit of the taxable base is also increased.
C. Defer some operations to 2023:
At this point in time, it may be in your interest to defer rents to the year 2023.
Thus, if it is up to you whether you choose to be recognised in the last days of 2022 or in the first days of 2023, our recommendation is to choose the second option, both to defer the generation of income to the following year and to try to apply a lower scale (for those incomes to which the general tax scale applies).
D. Income from work:
We recommend planning when it is appropriate to apply the reductions provided for in the tax regulations for irregular income such as a bonus.
In other words, if a higher bonus is to be received in the next 5 years, it is worth considering not applying the irregularity to the bonus to be paid in 2022, as not doing so would mean being able to reduce the bonus received at a later date.
E. Substitution of cash income for certain income in kind:
Even if it is no longer possible to do so at this stage, in 2023 it is interesting for employees, depending on the territory, to apply the substitution of monetary income for certain duly justified and documented non-taxable income in kind, such as the receipt of subsistence allowances, restaurant tickets, training programmes, medical insurance for the employee, spouse and descendants or the delivery of shares or holdings in the company itself or in companies of the group.
Finally, apart from the treatment of income obtained on a regular basis by taxpayers, it is important to take into account particular situations that may arise in each year with a specific tax treatment, such as maternity or paternity benefits, severance payments, divorce, exemption for reinvestment of the regular home, work abroad, the donation of the family business or the additional benefits established by the Historical Territories.
As a result of the above, without prejudice to the particularities approved by each of the three Historical Territories, which should also be taken into account by their tax residents, we recommend that you take these warnings into account before the end of the year in order to reduce the result to be taxed in the income tax return to be filed between April and June of next year.
We hope we have provided you with information of interest to you. If you need further information, please do not hesitate to contact us.
Please do not hesitate to contact us for further information.
Legal-Tax Department