9th May 2020

I have some clients who want to plan ahead in the second half of the year with regard to the income tax return they have to file the following year.

So they ask me what expenses, donations, etc. can be deducted, to pay as little taxes as possible.

I don't know what it's like in other countries, but in Spain you can't plan ahead in a particularly tax-efficient way. Legislative changes usually occur at the end of the year, and then it is difficult to react before the new calendar year starts.

In this article I would like to give an impression of the current situation, based on the income tax return 2019 that is currently due. The deadline is until June 30th, 2020.

If you are looking for some general information about the income tax in Spain first, please have a look at my article about it.

It is always good if the clients tell me what products for insurances, pension plans, investments in companies, donations, membership fees etc. they have or plan to have. Then I can check whether there are similar alternatives which offer a different tax treatment. But I would not recommend to contract some special product only because of taxation benefits, as they might change at any time.

There are general tax allowances, depending on the age of the taxpayer and the age of family members who live with and depend on him. Examples:

• Personal allowance: 5,550 EUR ("mínimo personal"),
• Taxpayers over 65 years: EUR 6,700,
• Taxpayers over 75 years: EUR 6,950,
• Child allowance: EUR 2,400 (first child), EUR 2,700 (second child), EUR 4,000 (third child), EUR 4,500 (fourth and further children). For children under 3 years the respective amount will be increased by 2,800 EUR. It should be noted here that this is the total allowance, i.e. if father and mother submit their tax returns separately, each can deduct half of the mentioned amount.
• Exemption for parents: if they live with the taxpayer, have little income themselves, are over 65 years of age or are disabled (at least 33%): between EUR 1,150 and EUR 1,400.
• Exemption due to disabilities (taxpayer or children): between EUR 3,000 - EUR 12,000 (depending on the degree of disability and the need for care).

Not all tax deductions are equal, there are basically 3 different types:

1.) Deductible expenses ("gastos deducibles") - expenses necessary to generate income.

2.) Reductions in the tax base ("reducciones") - this is deducted from taxable income.

3.) Deductions from the tax amount payable ("deducciones") - this is deducted from the result that you would actually have to pay.

Deductible expenses (= "gastos deducibles") are incurred costs that make possible to generate the income. These are expenses that can be deducted from the gross income:

For every type of income (work, rental income, capital gains, ...) there are different expenses that can be deducted. Here some examples:

• For income from work: the social security contributions paid by the employee, also e.g. compulsory contributions to professional chambers or costs of belonging to a labor union.
• For rental income: costs for insurance, caretaker, depreciation, etc.
• For income from investments: costs for the deposit and the transactions (there are special conditions).
• For income from capital gains: e.g. the notary fees in connection with the property sale, etc.

Reductions in the tax base (= "reducciones"), as the name suggests, are usually percentage rates or fixed amounts that can be deducted from the tax base, i.e. the taxable net income:

These reductions can be related to the respective type of income (e.g. because the state wants to promote certain activities) or independent of it. Here are a few examples for income-type based reductions:

• Rental income: if you have rental income where the apartment has been rented to private individuals and whose main residence it is, you do not pay taxes on 100% of the net income (= income - expenses), but only on 40%, i.e. there is a 60% reduction in the tax base.
• Income from work or self-employment: there is for example a 30% reduction in the tax base if you receive certain income at once, but have in fact worked to earn it over a period of at least 2 years (e.g. bonus payments, special premiums, agreed payment term only at the end of a longer period, ...).
• Income from self-employment: there is a reduction of the tax base if you didn't earn much in the previous year, if you just started your own business recently, etc.

And then there are general reductions in the tax base, i.e. the total amount of taxable income (regardless of the type of income), in particular:

• for joint assessment (EUR 3,400),
• for payments to a pension fund (Fondo de pensiones, max. EUR 8,000),
• for payments to certain insurance companies (e.g. in the event that you can no longer take care of yourself; special benefits apply if the beneficiary is disabled).

Here I can only recommend that you carefully examine the products you are choosing, because sometimes small differences in the design decide whether a reduction applies and in which extent.

Deductions from the tax amount payable ("deducciones") are those that can only be used if you actually have to "pay" something. So if you earn little and do not have to pay any taxes because of the personal and family allowances, you cannot profit from those tax benefits:

Examples of such deductions are: Donations to charitable organizations, investments in start-ups, etc.

There are also deductions in each province, depending on what the region wants to promote, for example deductions for rental costs, for the birth of a child, for the promotion of regional cultural assets or languages, and for investments in newly founded companies in the region.

Normally for the first 150 euros donated, the deduction is 75%, for the donated amount above 150 euros, the deduction is 30%.

As an example: If you donate EUR 15 per month to the Red Cross, then you donated EUR 180 a year. Up to EUR 150 you can deduct 75%, that is: EUR 112.50. For amounts donated above EUR 150, 30% are deductible. This would be (180-150) = 30 * 30% = EUR 9 here.

So in this example you paid EUR 180 and can deduct EUR 121.50 from your taxes payable. The whole amount of deduction in this case can only be used, if the taxes payable amount up to EUR 1,800 at least (because the deduction for donations can be used on a maximum of 10% of the taxes to be paid).

Another example: Your taxes payables are EUR 10,000. Then you can theoretically use the donations deduction for a maximum 10% of that amount, which would be EUR 1,000. In case you donate EUR 1,000, the amount deductible would be: 112.50 + (1000 -150) * 0.3 = EUR 367.50.

But if your taxes payable are only EUR 2,000, although you spent EUR 1,000 EUR on donations, you could only apply the deduction for donations for EUR 200 (=10%). The deduction in that case would be 112,50 + (200-150)* 30% = EUR 127,50.

My customers always expect miracles here, unfortunately the deductions for rental costs are actually quite small and tied to many requirements.

In Catalonia, the deduction is a maximum of EUR 300 a year (or EUR 600 if you have at least 3 children under 21 years old), and for this you must either be under 32 years old, or have been unemployed for at least ½ year, or you must be over 65 years old and widowed, or have at least a 65% degree of disability. In addition, the rental costs must exceed 10% of the net income and the tax base must not have been higher than EUR 20,000 a year.

In Madrid it is a bit better, as you can deduct a maximum of EUR 1,000 a year, but only if you are under 35 years old (or under 40 and unemployed and have at least 2 persons to take care of), your tax base is below EUR 25,620, the rental costs exceed 20% of this amount, and you provide proof that the landlord deposited the deposit, and that you as the tenant have paid the rent tax (ITP), which few tenants do.

I wanted to give an overview about what expenses are deductible, and in general which reductions and deductions exist in the income tax return in Spain. You should have them in mind when preparing your Spanish income tax return.

Especially on the level of the province you should check each year what special deductions are applicable, as they tend to change from year to year. 

If you want to read more about the income tax return in Spain in general, please have a look at my article about it.

If you need help with the preparation of your own income tax return, or you have questions about the deductibility of some expenses you made, please contact me! 

It is that easy.