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Tax discount: What is it and how it helps to save a family budget
Income declaration amid quarantine
In our previous articles, we covered various challenges that a taxpayer may face when filing a tax declaration. Today we will talk about the situation when the declaration is filed to receive a tax discount.
What you need to know about tax discount
Many of you have heard about tax discount as a way to reclaim a part of a family’s budget expenses; however, practice has shown that not everyone knows how to apply for a tax discount in Ukraine correctly.
The main expenses that are declared by citizens in order to apply for tax credit (as specified in para. 3 of Article 166 of the Tax Code of Ukraine) include:
- A portion of interest amounts paid for the use of mortgage loan
- Amount of money or value of property paid (transferred) to non-profit organizations in the form of donations or charitable contributions
- Amount of money paid to the educational institutions to receive compensation for education-related expenses
- Amount of insurance payments under the long-term life insurance agreements and pension contributions under the non-state pension insurance agreements
- Amount of expenses for the assisted reproductive technologies
- Payment for public services related to the adoption of a child
- Amount of money paid for vehicle re-equipment
- Amount of expenditures on building (purchasing) affordable housing as defined by law (including expenses for repayment of preferential housing mortgage loans granted for such purposes and interest thereon)
- Amount of money in the form of rent payments actually made by a taxpayer who has the status of internally displaced person
It is difficult to disagree that many of you have one or more expense items mentioned in the list above. What about your friends? Do they take an opportunity to benefit from a tax discount?
In our opinion, there are far fewer people applying for a tax credit than there really should be. The main reason behind this is the need to collect a package of documents and the actual process of filling out and filing a tax declaration, which may seem too difficult and complicated for an ordinary taxpayer.
We will try to unravel the tangle and explore a mechanism for applying the most common expenses from the above list to get a tax discount.
First, it is worth noting that not all expenses incurred over a year are refundable. A tax base is reduced by an amount of expenses incurred. Consequently, the tax will be reduced by an amount equal to 18% of an amount of incurred expenses. It is this 18 percent share of expenses that will be returned if a tax declaration is filled out and filed properly.
To claim a tax discount, a tax declaration should be submitted to tax authorities not later than 31 December of the year following the reporting year. If the right to receive the discount is not exercised within a year, it is not transferred to the next year.
An individual with income in the form of salary can be the tax discount recipient. In view of this, self-employed individuals, entrepreneurs, and individuals that receive passive income only are not eligible to receive tax discount.
Moreover, the amount of expenses that entitle a taxpayer to receive tax discount in the reporting year should not exceed the amount of total annual taxable income received in the form of salary.
The list of documents required to apply for a tax credit includes:
- Copies of the passport
- Certificate on the assignment of the taxpayer’s record card registration number
- Statement of salary received during the reporting year
- Copies of documents confirming payments made by a taxpayer (receipts, payment orders, etc.)
- Document confirming the degree of kinship (birth certificate, marriage certificate) if expenses were incurred for a family member
Now let’s take a look at specific examples – where citizens are entitled to receiving a tax discount – and additional documents required to claim a tax discount taking into account various types of expenses.
Compensation for education expenses
More often than not, to get a tax discount, expenses on educational services are declared. According to the State Tax Service, last year, a share of declarations filed for that purpose amounted to 80% in total declarations.
One may declare his/her education expenses or those of a family member who is in the first degree of kinship (children, husband or wife, parents) for preschool education institutions, institutions offering extra-curricular activities, institutions for general secondary education, institutions offering vocational (vocational and technical) education, and higher education institutions. This being said, it should be noted that educational activity should be the main activity of the institution.
In addition to the above set of documents, you will need a copy of a contract with the educational institution where the tuition fees shall be specified.
It is essential that, in the receipt, a recipient of the discount who files the declaration be specified as the payer. Payment for related services (e.g., catering) is not taken into
Life insurance and endowment insurance
A person can also declare expenses related to insurance payments under the long-term life insurance agreements and pension contributions under the non-state pension insurance agreements for both him/herself and for his/her family member who is in the first degree of kinship.
In such event, in 2019, expenses not exceeding UAH 2,690 per month for the taxpayer and UAH 1,345 per month for his/her family member who is in the first degree of kinship could be covered by the tax discount. In addition to a generic set of documents, an insurance services agreement should be submitted with the tax declaration.
When declaring a part of the interest amount paid for the mortgage, we also take into account special terms and conditions.
The mortgaged real estate (a house and/or an apartment) must be specified by the taxpayer as his/her primary residence as per endorsement in the person’s passport regarding his/her registration. That is why the interest paid for the mortgage can be attributed to expenses only starting from the year when you registered your residence at the new address.
When determining an amount of expenses that may be covered by tax discount, we use a ratio that takes into account a minimum area of the real estate to determine the tax discount (100 sq m). The ratio is calculated using the formula given below:
R = a minimum area of the real estate to determine the tax discount/the actual total area of the real estate
The right to include in the tax discount the interest amount paid for the mortgage can be exercised over 10 consecutive calendar years. Starting with the year in which the mortgaged residential property is purchased, the constructed mortgaged residential property becomes the property of the taxpayer and starts to be used as the primary residence.
In such event, additional documents are a notarized mortgage agreement and loan agreement formalized for the purpose of the purchase (construction) of residential property. It should be noted that interest on the loan must be specified in payment documents separately.
If you made donations or charitable contributions to non-profit organizations over the year and intend to get a tax discount based on this fact, you should take into account a few technicalities.
The non-profit organization should be registered in Ukraine and registered with the Register of Non-Profit Organizations and Institutions when the charitable contribution is made. Expenses should be reflected as an amount not exceeding 4% of your total taxable income (in the form of salary) received over the year. A copy of the extract from the Register of Non-Profit Organizations and Institutions should be attached to the tax declaration as a supporting document.
Fighting against the coronavirus
This year’s novelty was that the costs of combating COVID-19 in Ukraine were added to the list of expenses that may be covered by the tax discount following the 2020 reporting year results.
The expenses include the cost of medicines to provide medical care to infected persons, disinfectant and antiseptic products, medical equipment, personal protective equipment, medical devices for screening infected persons, as well as other medical devices, laboratory equipment or disposables related to preventing the spread of the coronavirus disease in Ukraine. Such medicines should be provided to public associations, charitable organizations, the central executive body that implements state policy on healthcare, healthcare institutions, etc.
To get the tax discount, one will need to provide a set of documents verifying incurred costs, and more specifically payment documents, copies of agreements identifying the seller of goods (contractors, service providers) and their buyer (recipient). In the documents, the cost value of such goods, works or services as well as a timeline for their sale (performance, provision) shall be specified.
As the costs of combating COVID-19 may only be declared to get the tax discount starting 2020, we will see them in the tax declarations not earlier than the next year – when the 2020 campaign for submitting tax declarations begins.
We hope that our articles were useful for both the taxpayers who are required to file tax declarations (by the way, there is not much time left – it should be done by 1 July 2020), and those who want to apply for a tax discount.
This article was prepared jointly with Victoria Chornovol, Tax & Legal Partner at Deloitte Ukraine