Deductions 

Description of the system of deductions
Deductions applicable to earned income only
Deductions applicable to capital income only
Tax credits
Nondeductible expenses

Description of the system of deductions

Deductions are very important in the assessment of income tax.  Deductions are items that reduce your total income and therefore reduce your overall tax liability.  The net amount after deductions is the net taxable income, and the tax you have to pay will be based on this amount.  Sometimes, the taxpayer is entitled to certain tax credits, reducing the amount of tax even more.

In this way, the net taxable income is the central amount, serving as the basis of the taxation of an individual taxpayer. 

The net taxable income is calculated from gross income minus deductions for acquiring income and for maintaining income.  In addition to these, so-called natural deductions, other deductions (called general and social) can be made, and these are usually granted if certain requirements are fulfilled.  Some of the deductions are tax credits, which means that they are directly subtracted from the amount of tax, not the amount of income.

The deductions concern each type of income separately.  For capital income, the deductions have to do with acquiring income and with maintaining income.  For earned income, the deductions are not only for acquiring income but also for general and social purposes. 

The amounts directly credited against tax usually concern state tax.  The amounts of paid interest can be subtracted primarily from the tax on capital income, and secondarily from the tax on earned income.  The losses, confirmed in the taxation for previous years, can be carried over to the following years, and credited against the taxes on the types of income concerned.

Deductions applicable to earned income only

Costs for acquiring income

You can deduct certain costs associated with your income-generating activities. Deductions are items that reduce your total income and therefore reduce your overall tax liability. 

The so-called natural deductions consist of the schematic deduction for acquiring income, the deduction for commuting costs between home and work, the deduction for paying trade union membership fees, membership fees of an unemployment fund, and other costs relating to generating or maintaining income.  Nevertheless, in the case of wage income, there is a schematic deduction for acquiring income, so only amounts in excess of the schematic deduction will qualify.  Net taxable earned income is calculated from gross earned income minus the natural deductions.

Moving on to the other deductions, the net taxable earned-income amount can further be reduced by deducting mandatory pension contributions, additional pension contributions, the deduction for a reduced capacity to pay tax, the pension income deductions concerning state tax and municipal tax, and additionally for municipal taxation only: deductions for disability, for study grants, for earnings etc.

Deductions to be declared in the income tax return

Some deductions are granted on demand.  All natural deductions except the schematic deduction for acquiring earned income fall into this category.  This especially concerns the deduction for a reduced capacity to pay tax. 

Deductions to be made ex officio

The general deductions are granted ex officio, so the taxpayer does not have to demand them.  Examples of these are the deduction for study grants, the basic deduction in municipal taxation and the pension income deductions.  If the tax authority is aware of the details of the disability, the tax credit for disability will also be granted ex officio, without any demand on the taxpayer's part.  The mandatory pension contributions include the worker's share of this contribution and the unemployment insurance contribution.  The taxpayer does not have to demand or declare the paid amounts, because the tax authority receives the necessary facts and information from the employers.

Deductions applicable to capital income only

Certain deductions only concern capital income, not earned income.  Examples of those are the costs associated with acquiring capital income, costs associated with acquiring an aftermarket bonus, losing money as a foreign-currency loss on certain loans, repayments of shareholder borrowing, forestry deductions and payments of interest.  From 2005 onwards, the contributions for voluntary pension insurance contracts are usually deductible against capital income.

In assessment, the capital income is treated as a single entity even if it consists of several different parts.  The net principle is applied.  Thus, if the taxpayer has paid a great amount of money as costs for acquiring income for a certain subtype of capital income, he is entitled to get a deduction for the cost against the proceeds of another subtype. This means that if the costs for acquiring rental income have been very high, and the amount of rental income is not high enough to make the deduction possible, the taxpayer will be entitled to the deduction anyway.  However, there are certain exceptions from this rule in the area of forestry, and in the taxation of capital gains and capital losses.

The taxpayer is usually under obligation to demand the deductions against capital income, because the tax authority does not grant them ex officio.  Certain confirmed losses make for a deduction that the taxpayer can have ex officio, but other deductions are only granted if the taxpayer demands them.

Tax credits

Some tax deductions involve reduction of the amount of tax to be paid.  When the computation is done in this way, the deduction does not affect the amount of net taxable income at all.  Examples of tax credits are the disability credit and the credit for the obligation to pay child maintenance.  The credit for domestic help concerns the state income tax on earned income and capital income.  If the taxpayer does not have enough state tax to make the full tax credit possible, the remaining amount can be credited against municipal tax, healthcare payment and church tax. 

Interest on loans

If the taxpayer has borrowed some money, he is eligible for tax deductions for paying interest on certain loans.  The general rule is to deduct the payments of interest from capital income.  But if the taxpayer does not have any capital income, the deduction will have to concern earned income.  The amount to be deducted is 28% of the paid interest (the 28% being the tax rate on capital income).  In this way, the tax benefit is exactly the same as if the deduction had been made from capital income. 

Tax-deductible payments of interest for borrowing are for house loans, study loans, loans taken up for the purpose of acquiring income and certain loans where the taxpayer is the guarantor, not the actual borrower.  No tax deduction is granted for other loans such as credit-card borrowing or other consumer credit contracts.

Nondeductible expenses

No costs are tax-deductible that do not bear a relationship with income generation, with the activity of acquiring income or with its maintenance and safekeeping.  As a result, the living expenses of a person are not deductible.  The rent of a house/apartment, the costs for looking after a household, taking care of the children are not deductible. Furthermore, the concept 'living expenses' also includes the clothing, hobbies and recreation and other expenses having to do with private consumption.   

Costs that relate to the generation of tax-exempt income are usually not deductible. As an exception from this rule, from 2005 onwards the costs of the taxpayer related to acquiring dividend income are tax-deductible, even if the dividend income itself is tax exempt.