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Tax incentives : Deduction, reduction, or tax credit

Deduction, abatement or credit of tax on income are different forms of tax assistance. These distinctions are important to take advantage of the aids to which it has the right and not to fall into the trap of tax benefits unfeasible.

This post discusses the tax incentives that the State provides to certain taxpayers to help families and elderly or disabled people, to encourage donation, or to encourage certain types of investments are beneficial for the environment or the economy.

The idea of this post was suggested by a discussion, an expert in taxation of individuals and author of the blog Thank you for his help.

Difference between deduction, reduction and tax credit

1. A tax deduction is deducted from the income before calculating the tax

The tax deduction reduces the tax indirectly, by reducing the income that is the basis for the calculation of the tax. The deduction the most common is the lump sum deduction of 10% for professional fees. It is applied automatically to income derived from activities if one has not opted to tax the actual costs. In the example above, a deduction of€ 3,000 brings the annual income of 30.000€ for an employed person with a taxable income of 27.000€.

Other examples of deductions are deductions for alimony paid to an ex-spouse, children, parents, and the deduction of certain pension contributions.

2. A tax reduction is deducted from the tax on the income

The tax cuts reduce the tax calculated by applying the marginal tax rate (MTR). They can reduce the tax to zero. But they do not give rise to a refund if they exceed it. Thus, in the example above, a taxpayer who has a right to 3.000€ of tax cuts will have his tax reduced from 2.450€ to zero.

The reasons for tax cuts are very different : school fees, employment of a housekeeper in the home, donations to organizations of general interest, rental investment PINEL or investments in SOFICA, FCPI or FIP. See the list below.

3. A tax credit is refunded to the tax and may exceed the amount

When the total tax credits entitlement of a taxpayer exceeds the tax or where the taxpayer is not taxable, the excess credit is refunded to him. In the example above, a taxpayer must 2.450€ tax after application of the IMT and discounts. As it has a right is entitled to $ 3000 in tax credits, it pays in the end zero euros taxes and receives 550€, 3.000€ less 2.450€.

The grounds of tax credits are as varied as those of the reductions : child care out-of-home, union dues, expenses related to the planning of energy to the housing or to accommodate an elderly person. See the list below.

That is why it is compliqué

En browsing through the list below, you will see that, for the same reason, the assistance can take different forms, depending on the situation. For example, the child care expenses :

If the child care takes place outside the home, it gives the right to a tax credit.

If the child care is a home care support, it entitles you to :

a tax credit if the single parent or the two parents are married or pacsé are enabled or applicants for employment,
a tax reduction in other cases.

This dual status of child care expenses applies in 2017 to the declaration of income tax from 2016. It will be removed next year, either for the declaration of tax 2018 on income 2017. The tax credit for employment-help at home will then be generalized to all the taxpayers, in activity or not, which may be very expensive to the State.

Why it is important

It is necessary to understand how the tax credits work to take advantage of those to which it was entitled. It also avoids falling into the trap of so-called tax benefits that you will not be able to benefit in reality. In fact, banks, insurers, real estate developers and other businesses often attract taxpayers in their claim of tax benefits. But these theoretical benefits may prove to be unachievable in the concrete situation of the taxpayer. Three main reasons :

 No tax, no deductions and discounts. The majority of the French, 54% in 2016, don't pay the tax on the income. Therefore, they cannot derive any benefit of tax deductions or tax reductions ! Only the tax credits providing assistance to them. Thus the transformation of the tax cuts for the employment of a home help in a tax credit in 2018 will require the State to repay € 1 billion of tax credits additional to the taxpayers !

 The evolution of income may be losing certain benefits. Some of the tax cuts on income, such as those related to the investment locatif Pinel, are spread out over a period of 3 to 9 years. If the taxpayer's income changes, for example if he loses his job or retires, he or she may lose the tax reduction on which he depended. His budget, if he has made this investment on credit, is completely unbalanced.

 The ceiling on tax reductions and credits limits the benefits. The most of fiscal aid are limited by ceilings. These caps define the maximum limits for each type of aid and limits to the total aid. The limit on the total discounts and tax credit, called the "ceiling tax" niches ", is fixed, by exception, to 10,000€. For example, a taxpayer who has a tax credit of 6,000€ for the employment of a home help and home to 6,000€ of tax reduction for the various investments that do not benefit the sum of 12.000€, but the ceiling of 10.000€.