Background
Italy has no personal relief nor (any longer) a no-tax area. This means that you start paying income tax on the first Euro of income. See the marginal rates and rates of substitute tax here. However Italy has an intricate system of tax reliefs (described generally as
- “deduzioni” – deductions from taxable income or
- “detrazioni” deductions from tax due – in other words a tax credit.
These deductions and tax credits refer to particular types of income. Where a specific type of income, as described below, is reported in the tax return, then, where there is a right to a specific deduction or tax credit, the tax on the relevant income will be reduced.
The system is designed to provide relief from tax for those on lower incomes or where there is a public policy motivation for exempting certain types of income from tax.
These reliefs, in the context of taxation of individuals, can be divided into three main categories:
- Tax Credits for Income from Employment, Self Employment and Pensions for low earners;
- Exemption from tax on official land registry income for a first home;
- Tax Deductions and Reliefs for qualifying expenditure, or investment.
This blog post deals with deductions and tax credits which are applied after the calculation of taxable income. There are shown in Sections RN and RP of the Italian tax return. Other types of deducible expenditure such a business expenses will be dealt with in the specific business income section of the tax return, with the net amount flowing through to Section RN.
Deduction For Income For Income from Land and Buildings (“Prima Casa”)
Tax Credits for a Dependent Spouse and Children
Tax Credit For Income From Employment
The deduction available for income from employment is set as a maximum amount, which reduces as income increases.
The figures required to calculate the deduction are as follows:
– the total employment income eligible for deduction (line RN1). This line must include rental income (including short leases) subject to the “cedolare secca” – the flat rate 21% tax on Italian source rental income, reported in line RB10 (14 and 15), even if this is taxed separately.
– any deduction for principal residence (line RN2),
– the number of days for which the deduction is due.
Special rules apply for employees who also have business income (e’g. from a trade or profession). Although the rules are intricate, taxpayers who have income from a single employment or pension income not exceeding Euro 8,000, and have no other source of income will pay no income tax. Above 8,000 the tax credit reduces to zero as total income hits Euro 55,000.
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Tax Credit For Pension Income
Tax Credit For Income From Self Employment (Reddito di Lavoro Autonomo)
Tax Deductions for Specific Qualifying Expenditure
See this article for more information on the types of deduction/tax credits available, the applicable thresholds and rules, and for the various types of qualifying expenditure. The principal categories are:
- Social security contributions
- Medical and Veterinary Expenditure
- Alimony paid pursuant to a court order to a former spouse of civil partner
- Charitable and Political Party donations
Tax Credits for Foreign Taxes Paid
See this article for more information on the workings of the system and procedures for offsetting the foreign tax.
Legislation:
Art. 13 of the Tax code, paragraph 1 establishes that:
“If one or more sources of income form part of total income as referred to in article 49, with the exception of those sources set out in paragraph 2, letter a), and 50, paragraph 1, letters a), b), c), c-bis ), d), h-bis) el),
a deduction from the gross tax due, pro rata according to the period worked during the year, equal to:
a) € 1,880, if the total income does not exceed € 8,000. The amount of the deduction effectively due can not be less than 690 euros. For fixed-term employment relationships, the amount of the deduction actually due may not be less than € 1,380;
b) € 978, increased by € 902 between the product and the amount corresponding to the ratio of € 28,000, less overall income, and € 20,000, if the total income is more than € 8,000 but not € 28,000;
c) 978 euros, if the total income is more than 28,000 euros but not 55,000 euros; the deduction is for the part corresponding to the ratio between the amount of 55,000 euros, less overall income, and the amount of 27,000 euros.”