Near the end of the year, it is time to analyse what can be done to adopt some tax decisions that will reduce the income tax bill for the current financial year 2022.
Although no major changes have been approved 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 that are available to us in order to reduce our tax burden:
- Contributions to pension plans.
- Deduction for the purchase or rental of a principal residence.
- 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 1.- Contribution to pension plans:
- 2 2. Long-term savings plans (PALP):
- 3 3. Transfers of assets by persons over 65 years of age
- 4 Measures related to the ownership or rental of housing
- 5 Other measures
1.- Contribution to pension plans:
Contributions to social welfare systems (pension plans) help to mitigate the tax bill, as they reduce the tax base. It should be remembered that the maximum deduction limit will be the lower of the following amounts:
- 30% of the sum of the net income from work and from economic activities, or
- 1,500 euros.
This limit may be increased by:
a) 8,500 euros per year, provided that it comes from employer contributions, or from contributions by the worker to the same social welfare instrument for an amount equal to or less than the result of applying the coefficient to the respective employer contribution:
Annual amount contribution Coefficient
Equal to or less than 500€ 2,5
Between 500.01 and 1.000€ 2
Between 1.000,01 and 1.500 euros 1,5
More than 1.500 euros 1
b) By 4,250 euros per year, provided that this increase comes from contributions to simplified employment pension plans for self-employed or self-employed workers or from own contributions that the individual entrepreneur or professional makes to employment pension plans, of which he is the promoter and also a participant, or to Mutual Social Welfare Funds of which he is a member, as well as those that he makes to company social welfare plans or collective dependency insurance of which, in turn, he is the policyholder and insured party.
In both cases, the maximum amount of reduction will be 8,500 euros per year.
However, people whose spouse does not earn net income from work and/or economic activities, or whose income is less than 8,000 euros per year, can contribute up to a maximum of 1,000 euros per year to the spouse’s plan with the right to a reduction.
2. Long-term savings plans (PALP):
Unlike contributions made to pension plans (which are deductible from taxable income 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 five years from its opening.
So if you are thinking of taking out a deposit, you may be interested in taking out a Long-Term Savings Plan (either an Individual Long-Term Savings Insurance -SIALP- or an Individual Long-Term Savings Account -CIALP-) before the end of the year if you plan to keep the amounts you put into it in 2022 for at least 5 years. In this case, you will not be taxed on the return it produces provided that the amount contributed per year does not exceed 5,000 euros, that you do not withdraw any amount before the end of 2027 and that the redemption is in the form of capital.
3. Transfers of assets by persons over 65 years of age
The capital gain generated by 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 home 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.
The disposal of any other property or right is also exempt if the amount obtained is reinvested in a life annuity, with a maximum of 240,000 euros.
1. Housing deduction
Insofar as possible, and subject to the caps set out below, it is always a good idea to make an additional payment to repay the mortgage before the end of 2022.
Although the deduction for investment in primary residence was eliminated with effect from 1 January 2013, taxpayers who still retain the right to apply it, those who purchased a home before 31 December 2012, will be able to deduct up to 15% of the amounts they used to pay for the property during the year, provided that it is their primary residence, up to a limit of 9,040 euros.
2. Rent payments for principal residence
This deduction was abolished as of 2015. It can only be applied by taxpayers who meet the following requirements: they have an income of less than 24,000 euros per year, they signed the rental contract before 1 January 2015, they have paid amounts for the rental of their main residence and they have taken a deduction for this in previous years.
Thus, in the 2022 income tax return, those who live in rented accommodation and signed the contract before 1 January 2015, could deduct 10.05% of the amount paid.
3. Deductions for efficiency-improving works
The temporary scope of application of deductions for works that improve the energy efficiency of dwellings has been extended for another year. Therefore, if you are thinking of undertaking this type of work, there is still time.
There are three types of deduction, each with its own limits, for works to improve the energy efficiency of permanent or rented dwellings:
-20% reduction for improvement works, up to 5,000 euros, that reduce the demand for heating and cooling.
40% reduction for improvement works, up to 7,500 euros, that reduce the consumption of non-renewable primary energy.
-60% deduction for energy rehabilitation works, up to 5,000 euros (accumulated up to 15,000 euros) for buildings of predominantly residential use.
If, once you have taken the deduction for energy efficiency improvement works on your income, you are granted a subsidy, you will have to regularise the tax situation so that the amounts corresponding to this subsidy are not included in the deduction base.
Reinvestment of capital gains
Apart from the reinvestment exemption for the over 65s described above, there is the possibility that certain capital gains may not be taxed.
In this respect, capital gains arising on the transfer of shares or holdings in newly created companies for which the deduction for investment or subscription of shares or holdings in newly or recently created companies has been taken, are excluded from taxation, provided that the total amount obtained from the transfer is reinvested in the acquisition of shares or holdings in the aforementioned companies. If the amount reinvested is less than the total amount received, the proportional part corresponding to the amount reinvested is excluded from taxation.
Capital gains obtained from the transfer of the taxpayer’s main residence would also be excluded, provided that the amount obtained from the transfer is reinvested in the purchase of a new main residence within two years of the transfer (both preceding and subsequent years). In this way, it is possible to neutralise the payment of capital gains tax on the sale of the main residence.
Compensation of rents
The end of the year is a good time to do your accounts and offset losses from the disposal of real estate or the transfer of an investment fund, 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.
It should be borne in mind that the negative balance resulting from the integration and offsetting of income from movable capital (dividends, interest, etc.) may be offset against the positive balance resulting from the integration and offsetting of capital gains and losses, subject to the limit of 25% of this positive balance.
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 to choose whether you receive a taxable income 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 and in your Autonomous Community a reduction is foreseen).
However, bear in mind that according to the General State Budget Law that is currently being processed, changes are planned for 2023 in the scale of taxation of savings, creating two new brackets for incomes above €200,000/300,000 of 27%/28%.
Special forward transaction rule
If you have transferred an asset, consider the possibility of using the special rule for forward transactions. In this way, the income obtained can be declared as and when the payments are due, which, in addition to deferring it, allows you to reduce the tax rate. In order to apply this special rule, there must be an agreed payment schedule and the last instalment must be due at least one year after the sale.
Remember that, as we have already mentioned, for 2023 it is planned to increase the taxation of savings income, adding two brackets to the rate: taxable income between €200,000 and €300,000 will be taxed at a rate of 27%, compared to 26% in 2022; and from €300,000 onwards, a rate of 28% will be applied (26% in 2022).
Therefore, there may be cases where it may be appropriate not to opt for the special rule, for example, in the case of an instalment transaction with a single payment due in 2023. In this case, if the taxable amount of the transaction exceeds €200,000, it is in your interest not to opt for the special rule for instalment transactions, but to be taxed in 2022.
When filing the tax return, 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 tax year 2022.
The first 150 euros of donations made to the beneficiaries of patronage give rise to a deduction of 80%. In addition, the amount exceeding this amount carries an additional deduction of 35%.
In order to reward regularity, anyone who has donated an amount equal to or greater than 150 euros per year to the same entity over the previous two years benefits from a deduction of 40%.
In addition, taxpayers may deduct from their tax liability 20% of membership fees to political parties, federations, coalitions and groups of voters, with a maximum deduction base of 600 euros per year.
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 this would mean reducing the bonus received later.
Substitution of cash income for certain income in kind
Although at this stage it may no longer be possible to opt for this, it is worthwhile for employees in 2023 to apply the substitution of monetary income for certain duly justified and documented non-taxable income in kind, such as the receipt of allowances, transport cards, restaurant tickets, training programmes, childcare vouchers, medical insurance for the employee, spouse and descendants, or the delivery of shares or holdings in the company itself or in group companies up to 12,000 euros.
Finally, apart from the treatment of income obtained by taxpayers on a regular basis, it is important to take into account particular situations that may arise in each tax 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 Autonomous Communities.
As a consequence of the above, without prejudice to the particularities approved by the Autonomous Communities which must 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.