5 tips for declaring and optimizing your income tax

The deadline for filing income tax returns has been set at May 31, 2022 for paper returns (for all French residents, including those abroad) and June 7, 2022 for online returns for French residents domiciled in the overseas departments.

As a reminder, income tax takes into account all income, whatever its nature (work income, capital income, property income, capital gains), generated during a year N by members of the same tax household.

This income is taxed according to a progressive scale in brackets, as follows:

The higher the taxable income, the more a portion of this income will be taxed at a high marginal tax rate.

Optimizing your income tax consists of reducing your marginal tax rate as much as possible, either by reducing the tax base or by benefiting from reductions or tax credits.

In this article, we present 5 good tips for declaring and optimizing your income tax.

Family quotient and tax household: Attachment of adult children.

The family quotient is set according to the taxpayer’s family situation and the number of dependents. It is calculated by dividing the net taxable income by the number of shares. The amount thus obtained is subject to the progressive scale and is therefore used to calculate the tax due.

Attaching a single adult child without family responsibilities to his or her tax household gives the right to an additional half share (or even a full share in the case of a single parent). If the child is married, in a civil partnership or responsible for a family, the connection allows a income reduction (€6,042 in 2021 per connected person).

In addition, if the child is in school, a tax reduction is granted up to €153 for high school and €183 for higher education. However, this possibility is not open only if the adult child is under 21 years old or if he is under 25 years old and continuing his studies.

In return:

• the income of this adult child must also be declared. Note, however, that certain income is exempt from tax on income. These include internship allowances and salaries of apprentices up to a limit of €18,760 in 2021 and salaries of students under 26 years of age earned during school holidays up to a limit of €4,690 in 2021.
• It will not be possible to deduct the payment of alimony to this adult child. Note, for example, that if the adult child is in need and domiciled by the parent, a flat-rate deduction of €3,582 is possible, without proof, for housing and food.

In summary, the choice of whether to attach an adult child is not easy since it is necessary to take into account:

• of the tax gain provided by the half-shares;
• the increase in tax generated by the child’s income and;
• of the tax impact of deductions.

A simulation of the two hypotheses is essential to determine the most attractive option from a tax perspective.

Salaries: flat rate reduction of 10% or option for actual costs?

One of the first questions employees have when declaring their income is whether it is more interesting to opt for the deduction of their actual expenses or to keep the flat rate deduction of 10%.

In fact, all employees and certain managers automatically benefit from a flat rate reduction of 10% applied to their salaries or income. However, they have the possibility of waiving this flat-rate deduction and deducting, instead, their real expenses, subject to being able to justify them.

The simulation, this time, seems simpler: if the real costs are greater than 10% of the salary or income, the choice is then quickly made. In reality, the prerequisite is the following: what are the actual costs actually incurred during the year and justified and admitted as deduction by the tax administration?

Below are some examples.

• Transportation costs from home to work

To this end, the tax administration publishes each year a mileage scale allowing the real costs linked to the use of the vehicle to be calculated. In principle, the maximum distance retained is 40 kilometers per day, except in exceptional circumstances (for example, in the event of precarious employment). In addition, it is possible to add parking costs and loan interest.

• Meal expenses

The tax administration also authorizes the taxpayer to deduct the price of meals in the event that he cannot return to take his meals at home due to his working hours or the distance from his place of work. Indeed, where applicable, these meal expenses are considered professional expenses. However, the tax administration provides specific rules. It assesses the price of a meal at home on a fixed basis. For the year 2021, the price is set at €4.95. Employees are therefore authorized to deduct additional costs incurred in relation to the price of a meal taken at home. If there is a method of collective catering at the workplace or nearby, the deductible amount is equal to the difference between the price of the meal paid and the value of the meal taken at home. In all cases, the employer’s contribution to meal vouchers must be subtracted.

• Material costs

Material costs can be deducted provided they relate to the exercise of the profession.

For example, it is possible to deduct the purchase price of a mobile phone if it is necessary for the exercise of the profession. If the acquisition price is less than €500, the entire price can be deducted. On the other hand, if the acquisition price is greater than €500, the price must be amortized over 3 years. In addition, operating expenses for a mobile phone (subscription and communication costs) are deductible. Finally, note that when the mobile phone is used for both professional and personal purposes, the deduction is reduced in proportion to the share of private use.

Due to the rules specific to each category of real expenses, it is advisable to be accompanied by a specialist when filing your income tax return, in order to avoid any risk of adjustment in the event of a tax audit.

Dividends: flat tax of 30% or option for the progressive scale?

If you are a partner in a company whose profit results allowed the distribution of dividends, you have certainly already asked yourself the question of the taxation of your dividends.

In principle, dividends are subject to a single flat-rate levy (PFU) of 30% composed of: 12.8% for income tax and 17.2% for social security contributions.

However, it is possible toopt for taxation on the progressive income tax scale (see table above). If applicable, this option allows you to benefit from a 40% reduction on the amount of dividends and a partial deductibility of 6.8% of the CSG. This option is express, irrevocable and global, meaning that it applies to all income from movable capital and capital gains from the sale of securities of the household.

A simulation is therefore necessary in order to assess the advisability of one or the other solution depending on your personal situation.

Using the land deficit: investing to reduce taxes

If you are the owner of accommodation that you offer for rent bare (i.e. unfurnished), you then receive so-called property income.

This income is taxed either at micro-land regime either at real regime :

• The micro-property regime gives the right to a flat-rate reduction of 30%. To be eligible for this scheme, rental income must be less than €15,000.

• The real regime allows charges to be deducted from property income according to expenses actually incurred during the year. This regime applies automatically when rental income exceeds €15,000 or, at the taxpayer’s option (in practice when expenses incurred exceed the 30% flat rate). 

Under the real regime, the deductible expenses are in particular:

• the management and administration costs of the property,
• taxes related to housing and not recoverable from the tenant such as property tax,
• repair and maintenance expenses, whether work caused by the dilapidation of the accommodation or to facilitate its rental;
• provisions for charges in the context of co-ownership
• interest and borrowing fees.

For certain taxpayers, the deductible charges may be higher than the property income generated: in this case, this produces a land deficit.

The fraction of the land deficit resulting from deductible charges, excluding those resulting from loan interest, are attributable to overall income within the limit of 10,700 euros per year (for the year 2021). Any surplus can be carried forward to subsequent property income.

Mechanically, the land deficit therefore reduces taxable income and a fortiori household taxation.

Tax exemption via real estate investment can take several forms: neutralize taxation on rental income, reduce taxable income or obtain a tax reduction. Different tax arrangements can be suggested depending on the profile of the investor and the desired investment (furnished rental or bare rental, old or new).

Tax credits and reductions  

Tax credits and reductions reduce not the tax base, but directly the amount of income tax.

They are linked to certain expenses such as:

• Donations to associations: these donations offer a tax reduction of 66% for amounts donated to an association of general interest or public utility and of 75% for associations which provide free medical assistance to the most vulnerable people.
• The tax credit for employing an employee at home: taxpayers who incur expenses for personal services can benefit from a tax credit up to 50% of the expenses incurred, up to the annual limit of 12,000 euros, possibly increased. This may include childcare expenses, school support, housework, etc.

Union dues and rental investments may also be cited, subject to meeting certain specific conditions.

The expenses giving rise to a reduction or tax credit are exhaustively listed by law, but can considerably reduce income tax provided they are declared in due form. 

There are several tips and tricks for reducing the amount of your income tax. However, they must be used with perfect knowledge of the tax rules in order to avoid any risk of adjustment.
The LEGALPROTECH-AVOCATS firm supports you with your income tax declaration, but also in the event of a tax audit to preserve your interests.

Have you already filed your declaration? You have until the filing deadline to file a corrective declaration with the tax authorities.
A correction service is available (early August) for taxpayers who have declared their income online.
Finally, once the tax notice is received, it is possible to correct a declaration error by filing a claim until December 31 N+2.

Cabarrus Yanna
Lawyer in business law and taxation