Reducing your income tax: 7 solutions for tax exemption
Income tax represents 25% of net government revenue. If it is not its main source of income, it is on the other hand one of the major items of expenditure on the budget of the French. Faced with ever-increasing inflation, many taxpayers are trying to optimize their investments to reduce income tax. Here are the solutions available to them.
How is income tax calculated?
Income tax revenues are intended to finance the largest national budgets, allocated to education and research, defense and national security, and finally to territorial development. It is calculated on the basis of net taxable income, which is made up as follows:
- The taxable net salary or salary, including the net salary to be paid (gross salary – employee contributions), daily social security allowances, benefits in kind, overtime, non-deductible CSG, CRDS in full;
- Pensions and life annuities of the annuitant;
- Industrial and commercial profits (BIC);
- non-commercial benefits (BNC);
- Income from movable capital (investments, treasury bonds, dividends, etc.);
- Farm income;
- Property income (rent received, real estate investment funds, etc.);
- Capital gains realized in the context of a real estate sale, for example.
As you will have understood, all income is taxable, and some of it, having not been subject to social security contributions, is subject to tax. This will include agricultural and land income, and realized capital gains.
From these elements can be deducted other items that impact the real income of taxpayers:
- A discount in the event of low resources for students, low-income households, etc. ;
- A cap on the effects of the family quotient, set at €1,592 for each additional half-share, and €796 for each additional quarter-share;
- Reductions, deductions or tax credits, for energy renovation work, retirement savings, home services, donations to associations, investment in SMEs, regulated real estate investment, etc. ;
A fixed allowance of 10% of the total then applies, capped at €12,829 in 2022. The taxpayer may, however, prefer the deduction of his actual costs generated by his professional activity (mileage costs, meal costs, double residence costs, etc.), according to the formula which gives him the best advantage.
Income tax is calculated according to a progressive scale, sequenced by tax brackets, within which a TMI is applied (Marginal Tax Rate), which can be 0, 11, 30, 41 or 45%. A taxpayer is considered to be heavily taxed when his IMR reaches the 30% level.
Since January 1, 2019, the withholding tax has come into effect. Its principle is simple: the tax is deducted monthly from the pay slip, before the payment of the income. In the summer, following the annual spring declarations, the tax rate is readjusted if necessary, and the overpayment is refunded, or the underpayment is due. Thus, the payment is spread over 12 months, and not 10 as before, and the one-year lag is removed. The interest of its implementation? Eliminate the financial difficulties of taxpayers who have suffered a significant drop in income over the year, and a better readability of income tax. Disadvantage ? The employer enters into the intimacy of the employee, and the tax deducted from the salary impacts in particular the conditions of access to housing (a salary equivalent to three months’ rent).
What is tax exemption?
Tax exemption is obtained by registering among the many existing systems, put in place by the State, to encourage savings which finance the economy, and real estate investment to supply, renew and renovate the existing stock. of accommodation. Tax exemption is therefore a solution for reducing income tax, through three possibilities: tax deduction, tax reduction, or tax credit.
- Tax deduction: This is an amount that is deducted from income, before the amount of tax is calculated. It directly impacts the annual taxable income;
- The tax reduction: Unlike the deduction, it is subtracted from the amount of the calculated tax. It only applies if a tax is due, and in no case gives the right to recover the amount;
- The tax credit: This is an amount due by the State, reimbursed at the time of the annual declaration. It will either lower the amount of tax due if it is greater than the amount of the tax credit, or be paid back to the taxpayer in the case of non-taxation or an overrun.
While tax exemption offers the possibility of considerably reducing income tax, it is however capped at €10,000 per taxpayer per year. This is called “the capping of tax loopholes”. However, two items are exempt from the calculation of the tax niche base. First, the advantages linked to the personal situation, such as the effects of the family quotient or assistance for the disabled or elderly, for example, but also actions without compensation, in particular donations to organizations of general interest. Not that the latter are exempt from the ceiling, they are simply extracted from the calculation of the tax niche ceiling.
What solutions to tax exemption?
Tax advantages, also called “tax loopholes”, are tax exemption procedures to designate all the legal provisions intended to reduce the charges and the amount of income tax for taxpayers.
Real estate tax exemption
This is one of the most popular solutions as we know how much real estate is a rather serene investment sector. Faced with a severe housing crisis, and the definition of so-called tense areas, where the housing supply and demand market is totally unbalanced, the State has set up tax exemption schemes encouraging real estate investment for leasing, with capped rents, capped tenant resources, and significant lease term obligations. All this to relaunch the renewal of the national housing stock, not to respond to the housing crisis only with social housing, and to ensure the maintenance of old buildings, to revitalize city centers and historic districts. Here is each of the devices briefly presented.
- The Pinel device: By investing in a new residential dwelling or in the future state of completion, presenting a significant overall energy performance, the investor can benefit from a tax reduction, which can be equivalent to 12% of the capital invested. for a lease of at least 6 years, 18% for at least 9 years of lease, and 21% for at least 12 years. The tax benefit is spread over the entire duration of the commitment, in the limit of an overall ceiling of €300,000, and €5,500 per m² of living space;
- The Censi-Bouvard system: By investing in new housing in a furnished residence, rented by commercial lease to the operator of the residence, the investor can benefit from a tax reduction equivalent to 11% of the cost price excluding taxes of the housing , spread over 9 years, within the limit of €300,000 excluding tax of the cost price. In some cases, he may also recover the VAT on his investment;
- The Denormandie system: By investing in an empty dwelling located in an area to be revitalized or revitalized, requiring heavy renovation work equivalent to 25% of the overall cost of the investment operation, the investor will be able to claim a reduction of tax of 12% of the net cost price of the property for a rental commitment of 6 years, then 18% for 9 years, and finally 21% for 12 years or more;
- The Malraux system: By investing in an old dwelling recognized as a “remarkable building” and part of a process to safeguard French architectural heritage, requiring major renovation work, the investor will then be able to claim a tax reduction of up to 30% of the amount of the work undertaken on the condition of committing to renting it out for at least 9 years.
The SCPI and the SCI
They have nothing to do with each other, but are cited together because they offer the same tax exemption process. Indeed, the principle is to dismember the property so that investors or partners gain tax. Bare ownership does not generate land profit, therefore does not increase the tax. On the other hand, the works and the amortization of the loan can be declared as expenses, therefore as the land deficit, and thus allow a tax reduction.
It is probably the best tax exemption product today. For what ? Because it is open to all budgets unlike investment in stone which requires a certain capital all the same. Several savings products exist, but two flagship products allow tax exemption:
- Life insurance: Taking out life insurance offers the possibility of saving the desired sums, designating beneficiaries in the event of death, which partially extracts inheritance tax, and benefiting from savings at any time on the life of the contract. Each payment made is tax deductible;
- The Retirement Savings Plan (PER): Subscribing to a PER means securing financial savings for retirement, in the form of an annuity or capital, partly extracted from inheritance tax. The tax exemption is obtained by the deductibility of each payment made, within the limit of 10% of the annual net salary. This deductibility is not included in the ceiling for tax loopholes of €10,000. The disadvantage: the savings paid into it are blocked until the legal retirement age, except in the exceptional case of an accident in life or the purchase of the main residence.
Energy renovation works
In its fight against the energy losses generated by housing called “thermal sieves”, the State has set up a tax credit for owners wishing to improve the energy performance of their main dwelling, by renewing the thermal insulation, by the installation of solar panels or photovoltaic panels, by the renewal of an oil boiler, or by the installation of a charging infrastructure for electric vehicles (IRVE). It corresponds to 30% of the expenses incurred, provided that a certified professional RGE (Recognized Guarantor of the Environment) is used. The energy transition tax credit, commonly called CITE, is capped over 5 years at €2,400 for a single person, and €4,800 for a couple subject to joint taxation. It can be increased by €120 per dependent.
Please note, the Denormandie and Malraux schemes, which aim to renovate old or listed housing, are not eligible for this tax credit which is reserved for the owner’s main residence.
Investment in SMEs
Through Mutual Funds for Innovation (FCPI), or Local Investment Funds (FIP), financial investment in innovative and promising Small and Medium Enterprises (SMEs) is welcomed by the State. by an 18% reduction in the amount invested on income tax. This reduction percentage was pushed to 25% on the 2021 tax return, to satisfy the economic recovery.
However, this placement must be thought over the long term. The invested capital is blocked for at least 5 years. Tax exemption, therefore the desire to reduce your monthly tax deduction now at source, should not impact the budget too hard and thus make the end of the month untenable. This process will therefore not be suitable for all taxpayers.
By having recourse to home help, a tax credit corresponding to 50% of the expenses incurred will be paid to the taxpayer who then assumes the function of employer, within the limit, however, of a ceiling set at €12,000, that it remunerates the employee by CESU or not (Universal Service Employment Check). The ceiling may be raised if the household includes children, people over 65 or disabled people. However, the type of home help must be eligible for tax exemption: childcare, school support, assistance for the elderly or disabled, etc. It should be noted, however, that the expenses incurred relating to minor work or computer assistance are capped differently.
Patronage or donations
Patronage is the donation or material support (cash, nature or skill) given to a work or to a person for the exercise of activities of general interest, provided without any consideration. These shares are tax deductible up to 66% of the amount paid, within the limit of 20% of overall net taxable income. A clarification is still necessary as to the type of association or structure concerned. It must fall into one of these categories:
- An association or foundation recognized as being of public utility;
- A public or private institution of higher education or artistic education, of general interest, non-profit;
- A public or private organization whose management is disinterested (unpaid directors, or with limited remuneration), and whose main activity is the presentation to the public of dramatic, lyrical, musical, choreographic or circus works;
- An endowment fund;
- An organization of general interest (association or foundation) whose management is disinterested, the activity is not lucrative and is not exercised for the sole benefit of a restricted circle of individuals.
By making a donation for the latter, to an organization of general interest, such as the Restos du Coeur, the Red Cross, Doctors Without Borders, Action against Hunger or Emmaus, the tax exemption will then be increased to 75%. sums paid, capped however at €553.