The Luxembourg tax code offers us numerous ways to cut our tax bills. But you need to get moving before the end of this year to benefit. Subscribing to a particular sort of retirement pension life insurance policy (known as “111bis”) is a popular move. Annual payments from €1,500 to €3,200 (depending on your age) can be written off, with older people getting to write off more. Ask your bank or insurance company for details.
You can also claim back up to €672 multiplied by the number of people in your family for each of the following: life insurance, health care insurance, civil responsibility (3rd party) insurance and housing saving plans. Again, your financial advisor will be able to point you in the right direction.
Many tax breaks
The state also subsidises borrowing. If you want to borrow for a new car or a holiday, the state will let you write off €336 per person in the household for personal loans. Housing loans are also encouraged, with you able to write off interest related to the purchase, construction, renovation and redecoration of your home. Often home cleaners and nannies are paid in cash on the black. But if you declare this home help you can write of up to €3,600 per year. The same goes for crèche fees and help for the aged.
Charitable giving is another way of avoiding a tax bill, as up to €1m can be written off by donations to officially approved Luxembourg-based charities. Eco-transport is also supported, with tax deducted for electric cycles and cars.
More than this, though, having a nuclear family is one of the best ways to save tax. Being married or in a civil partnership puts tax payers into tax class 2 which leads to a substantial tax boost. Similarly, having children is subsidised through the tax system with further allowances. Alimony can also be off-set. Up to €24,000 can be written off, but with that sum then taxable for the receiving spouse. Single parents can also claim a tax credit up to €1,500.
Big choices for cross-border commuters
The 2018 tax year features significant changes for non-resident workers. Over the next few months they have some major decisions to make. In its 2016 tax reform the government said the “regime for non-residents will be aligned with that of residents”. This concerns whether they fall into tax class 1 (mostly applicable to unmarried residents) or tax class 2 (people who are married or in civil partnerships).
Households with one wage earner who is a cross-border commuter earning all their income in Luxembourg will mostly be better off under the new regime. This is just like their resident colleagues. However, if their partner works outside the grand duchy this will now have to be declared on the 2018 tax form if they opt for tax class 2. Previously this foreign earned income did not need to be declared.
Before 2018 married/partnered non-residents chose the advantageous tax class 2, without any need to declare their spouse’s income in Luxembourg. From 2018 this will change, with the frontalier either choosing tax class 1 (and thus foregoing the substantial tax break that comes with being married/in a partnership) or tax class 2 where their spouse’s income will be considered for taxation in Luxembourg.
The choices
“Non-residents will be assigned tax class 1 as a default position, and must meet certain conditions to elect for and obtain tax class 2,” Laura Foulds, managing director of Analie Tax & Consulting, explained. “Opting for tax class 2 must be made on the tax card or by completing and filing a tax return by 31st March 2019,” she added.
Non-residents living in France and Germany can opt for tax class 2 if 90% of their income comes from Luxembourg. This figure is 50% for Belgian residents. This excludes the first 50 days of working abroad and €13,000 personal income.
This has come as a shock, as many cross-border workers had a more favourable deal than residents. “The tax administration has calculated that around a third of non-resident workers will benefit from the changes, but two-thirds will lose out,” noted Philippe Graces, director of AssCoFisc. He points out that it will generally be lower earners who will lose most. Also may now have to go to the effort of completing a tax return for the first time.
On top of this, Foulds is concerned about how accurate the tax office will be when applying the rules. “Those with the most uncertainty are individuals whose situations changed in the year... we anticipate many will have a year-end adjustment one way or another,” she said. “Assessments will have to be made on a case by case basis on whether they should opt for tax class 1 or 2,” said Graces.
So after taking steps to reduce your bill this year, the information about incomings and out-goings will then need to be communicated to the tax office via the tax form. “Tax payers receive a letter from the tax administration in February informing them they must file a return by 31st March, but they have more time than this,” commented Graces.
Normally people can wait until before November without the risk of penalties for late filing. However, for non-residents who want to change their tax class they must file their return by 31 March 2019, or the default tax class 1 will be applied.