Income Tax: Where Do We Benefit Most From Lower Taxes?

Income tax: where do we benefit most from the tax cut?



Income tax: where do we benefit most from the tax cut?
[INCOME TAX] The tax cut announced by the President of the Republic in the spring of 2019, and included in the Finance Act for 2020, benefits the taxpayers concerned from January onwards. Who benefits the most and how much?

[Updated on Tuesday, January 28, 2020 at 4:25 p.m.]One year after the implementation of the new collection method, the Ministère de l’Action et des Comptes Publics (Ministry of Action and Public Accounts) provides a report on the source deduction. The government takes this opportunity to communicate the income tax cut from January2020 for 17 million tax households, announced by Emmanuel Macron in April 2019. In particular, the Executive reveals the proportion of taxable households benefiting from the measure by department. With 80% of taxable households benefiting, Haute-Savoie is the territory that benefits least from the fiscal boost granted by the executive. It is followed by the Ain and Paris, where the rate reaches 88%. At the opposite end of the scale, Seine-et-Marne is the department with the highest rate of beneficiaries of the measure, at 95%. The Loiret, Lozère, Oise, Seine-Maritime, Deux-Sèvres, Cher, Corrèze, Doubs and Gers regions are all on the second step of the podium, with 94% of taxable households affected by the tax cut.

One year after the introduction of the withholding tax, which replaced the collection on tax advice as of January 1, 2019 for the majority of taxpayers, it is the turn of the income tax scale to be turned upside down as of January 2020. The purpose of this new upheaval? Implementing the €5 billion income tax cut for nearly 17 million tax households. This represents an average gain of 300 euros per household, according to the executive. Find out more about the new progressive scale as it appears in the Finance Bill for 2020, to be applied from January.

How do you calculate your income tax?

  • Step 1: Divide your taxable income by the number of units
  • Step 2: apply to each bracket its tax rate
  • Step 3: add the taxes and multiply the total by the number of shares

To calculate the amount of your gross tax, you must first divide your net taxable income by the number of FQ units you are entitled to. This depends on your family situation (single, married, Pacsé(e), divorced, separated, widowed or widowed) and the number of people you may have to support (minor children, adults, disabled persons, invalids). Next, the 2020 income tax scale (detailed below) should be applied to the result of this division. Finally, you must add the tax amounts obtained per bracket and multiply the total by the number of units. Let’s take the example of a single person without dependent children with a net taxable income of 35,000 euros. Under the rules for calculating the number of units, the investor is entitled to only one unit. The steps to calculate your income tax are as follows:

  1. Divide your taxable income by the number of units, i.e. : 35 000 € / 1 = 35 000 €
  2. Apply to each bracket its tax rate, i.e. : Up to 10 064 € : 0 € ; From 10 065 € to 27 794 € : (27 794 – 10 065) x 11% = 17 729 x 11% = 1 950,19 € ; From 27 795 to 35 000 € : (35 000 € – 27 520) x 30% = 7 205 x 30% = 2 161,5 €.
  3. Add the taxes and multiply the total by the number of shares: (0 € + 1 950,19 € + 2 161,5 €) x 1 = 4 111,69 €.

35,000 received by a single person with no dependent children is therefore 4,112 euros, compared with 4,700 before the application of the income tax reduction in 2020. That’s a gain of 588 euros.

The amount of net tax payable is the adjusted gross tax :

  • the Family Quotient Cap, which limits the tax reduction related to the number of units; and
  • of the discount in case of low resources. For the 2020 tax, the amount of the tax is equal to the difference between 777 euros (1,286 euros for a couple subject to joint taxation) and 45.25% of the gross tax. Example, for a single person whose gross tax is €1,300: €777 – €1,300 x 45.25% = €188.75. The amount of the discount is equal to EUR 189.
  • the exceptional contribution on high revenues
  • of various tax cuts. It should be noted that tax is not payable when its amount, before application of any benefits, is less than 61 euros.

Income Tax Simulation

The Directorate General of Public Finance (DGFiP) provides you with two tax simulation tools online. Which one to choose? If, in addition to salaries, pensions or retirement, property income, gains from the sale of securities, social rights and similar securities, you must declare income from commercial, liberal or agricultural activities, investments in overseas departments or overall deficits (professional deficits), prefer the full model. Conversely, if you only have basic income and expenses to declare, opt for the simplified version. For the tax simulator to work, the fields must be filled in euros, without the cents. The tax simulator works for the calculation of the 2019 tax on 2018 income. With the entry into force of the withholding tax on income tax at source on 1 January 2019, the tax authorities now offer a withholding tax simulator, enabling taxpayers to obtain a simulation of the monthly amount deducted by their employer. 

What is the income tax schedule?

The income tax scale is used to calculate the amount of gross tax: it is made up of 5 brackets of taxable income and a tax percentage for each of these tax brackets. It is revalued each year to take account of inflation and thus preserve the purchasing power of households. The Finance Act for 2020 provides for the indexation of the income tax scale to inflation, i.e. an increase in the thresholds for entry into the brackets of the scale, but also, in order to reflect the reduction in income tax desired by the President of the Republic for 2020, a reduction in the rate of the first taxable bracket of the progressive income tax scale. The slope of the discount is also attenuated.

What are the different income tax brackets?

Tranche

Taxable income

Rates

1

Up to €10,064

0%

2

From €10,065 to €27,794

11%

3

From 27,795 to 74,517 €.

30%

4

From 74,518 € to 156,806 €.

41%

5

Over €156,806

45%

The above tax rates are those applicable for a share of the family quotient. For income generated from January 1, 2019, the ceilings of the brackets of the neutral rate grids of the withholding tax are indexed to the evolution of the first bracket of the income tax scale. It should also be noted that the ceiling of the tax advantage of the family quotient increases in 2020 from 1,551 euros to 1,567 euros for a half tax share.

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