4 ways to reduce tax on IR income in France

In this article I will tell you about 4 ways to reduce your income tax. And at the same time, how to calculate it in 4 stages. I have highlighted all terms that will be discussed further in the text in bold.

Information updated 07/01/2022

Well, are you ready? Go…

Characteristics of income tax

I’ll start, perhaps, with the main characteristics, for those who don’t know:

• Reporting period - year;
• Taxpayers are individuals;
• This is a single tax on all categories of income;
• Mandatory for French tax residents;
• Calculated by progressive tax rate.

Determination of French tax resident

• People living in France (alone or with a spouse and children);
• Or those who carry out professional activities in France, whether for hire or not. And at a minimum, if they confirm that this is their main activity (the main activity is the one on which you spend more time);
• Or people whose center of economic interests is in France (if you have more income from French sources than income from foreign sources, then your center of economic interests is in France).

These criteria are not cumulative; one of them is sufficient to determine tax residence. Read more here.

Stage 1 – Net tax income

The basis for calculating tax is net tax income Revenue net impossible (Further—RNI). And to calculate it, we first need to calculate gross total income Revenu brutal global (Further- RBG) .

RBG includes the following categories:

• Wages, pensions, RVTO life annuity, unemployment benefits, sick leave, etc.;
• Business income (BIC, BNC, BA);
• Income from financial assets (including income from Assurance Vie, Compte Titre, etc.);
• Profit from the sale of financial assets;
• Income from real estate and profit from its sale.

1 way to reduce tax:

To calculate RBG, take the amount of net income for all of the above categories minus expenses associated with receiving or retaining income received.

For example, for the income category - wages: to calculate your RBG, you need to take your salary sheet for December 2021 and indicate as income the amount from the Revenu net fiscal line and subtract from it Frais professionnels. They make up your choice of either standard deduction 10% from Revenu net fiscal or real costs.

This year the amount of the standard deduction (déduction forfaitaire) cannot be lower than 448 € and higher than 12,829 €. If your actual expenses are higher than 10%, then you can deduct them from your income in full. However, in this case you will have to provide documents confirming your expenses. Each member of the tax nest (foyer fiscal) has the right to choose his own way of deducting professional expenses.

2 way to reduce tax:

To calculate RNI, RBG is also subtracted Charges déductibles. These include (non-exhaustive list):

• Payment of alimony;
• Yours contributions to additional pension PER, PREFON, PERP (loi Fillon art. 163, loi Madelin art. 154, art. 83);
• Contributions to voluntary insurance TNS on Prévoyance, health insurance (loi Madelin art. 154);
• Expenses for the maintenance of persons over 75 years of age, excluding alimony;
• Land fees for historical buildings, etc.;
• Expenses for major repairs (optional);
• Expenses for the payment of certain pensions;
• CSG is partially tax deductible on some property income;
• and etc.

RNI = RBG — Charges déductibles

Stage 2 – Composition of the tax household foyer fiscal

The composition of the foyer fiscal is calculated in the number of parts, this is 3 way to reduce RNI.

• Spouses related by marriage or PACS: jointly declared, exceptions possible;
• Minor children;
• Adult children under certain conditions;
• Cohabiting partners (civil marriage);
• Others (persons with disabilities, having family relationships with or without the taxpayer, and living under the same roof).

How to calculate the number of parts is indicated in the table

How to calculate the number of shares for children if the parents are divorced

When maintaining children together:

• 1 child - 1/4 part,
• 2nd child - +1/4 part,
• starting from the 3rd child - +1/2 part.

For exclusive child support:

• 1 child - 1/2 part;
• 2nd child - +1/2 part;
• starting from the 3rd child - +1 part.

Conclusion: the number of children, as well as the marital status of the couple, is a way to optimize taxes.

Stage 3 – Determine the tax rate

In the previous 2 stages, we calculated the Net Tax Income (RNI) and the number of parts in the foyer fiscal. Now, to determine your marginal tax rate (TMI), you need to:

RNI / Number of parts foyer fiscal

Compare the resulting amount with a progressive scale and determine your TMI. It changes every year, and this year the rates have also changed. In order to correctly calculate the tax, you need to update the data every year.

Tax scale for 2022

Source https://www.economie.gouv.fr/particuliers/tranches-imposition-impot-revenu

Example: Misha Ivanov is a bachelor, his Revenu imosable 2021 is 40 K€, falls into the TMI 30% scale. But this does not mean that he will pay 30% on all his income. Each level of his income will be taxed at the appropriate rate.

Then you need to multiply everything again by the number of parts of the foyer fiscal.

Stage 4 – Calculate the tax payable using an example

So, we have determined the gross tax. But there are also adjustments here and this 4 ways to reduce or increase the tax payable.

Adjustments:

•  — Tax deductions (hereinafter Réreductions d'impot);
• + Capital gains tax at a proportional rate;
• + Refund of tax breaks or tax credits previous periods;
• + Additional taxes (CEHR);
• - Other expenses, e.g. tax benefits (Further Crédits d'impot);
• Limitations on tax deductions.

As you can see, there are 4 ways to reduce income taxes:

1. Due to deductible expenses from the income category;
2. Charges déductiles, subtracted from RBG;
3. Number of parts in the foyer fiscal tax nest;
4. Due to tax deductions and adjustments.

I will give an example of calculation using the example of our friend Misha Ivanov. He is employed, Revenu imosable 2021 - 40 K€, frais réel amounted to 200€/month, and his contributions for pension contract PER in 2020 amounted to 200 €/month.

Stage 1. RNI = Revenu imosable - frais pro - Charges déductibles

• Standard deduction: 40,000 x 90% = 36,000€
• Deduction frais reel: 40,000 – (200 x 12) = 37,600€

In our case, it is more profitable to use the standard deduction.

• Charges deductibles: 36000-(200 x 12) = 33600€

Stage 2. Number of parts foyer fiscal

Misha is a bachelor, which means he has 1 part.

Stage 3. We determine the TMI tax rate.

RNI / number of parts foyer fiscal. 33600 / 1 = 33600€ - TMI 30%.

Stage 4. We calculate the tax

• (10226 - 0) x 0% = 0€
• (26070 – 10226) x 11% = 1743€
• (33600-26070) x 30% = 2259€

Let's sum it up: 0 + 1743 + 2259 = 4002€

And multiply by the number of foyer fiscal parts: 4002 x 1 = 4002€

How contributions to an additional pension helped you save 720€

From the calculation given above, we see tax savings due to the contribution to the additional pension. And it amounted to 720 €. Let's compare what tax Misha would have paid if not for his pension contract.

Here's the calculation:

If Misha had not made any contributions to the pension contract, his RNI would have been €36K. TMI is still the same 30%. Tax calculation:

• (10226 - 0) x 0% = 0€
• (26070 – 10226) x 11% = 1743€
• (36000-26070) x 30% = 2979€

Let's sum it up: 0 + 1743 + 2979 = 4722€

Difference: 4722 – 4002 = 720€

And by the way, thanks to contributions to the supplementary pension, you can reduce this year's tax and receive a refund of overpaid Prélèvement à la source (PAS) taxes next year.

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Useful link to income tax simulator

https://simulateur-ir-ifi.impots.gouv.fr/calcul_impot/2022/simplifie/index.htm