The online platform for tax advice to freelancers, Declarando, has prepared a guide with tips that can help optimize the statement of income. In any case, the maximum date to make these decisions, and that beneficial tax effects are derived from them for this year’s declaration, is December 31, 2021.
The first thing is to do a forecast of what will be paid in rent. If we do not know this data, any exercise that is proposed to optimize for our return will be an impossible task. To calculate it, we can use the simulator on the Treasury website, estimating what our profit will be at the end of the year, and the total IRPF withholdings from our invoices or the payments of model 130, if we have it. Some online tax advisory tools also have functionalities to simulate in real time how much rent will be paid, based on the invoices and expenses included so far in the accounting.
Although we are already at the end of the year, it is important to control the section of personal income tax in which we operate. Depending on this aspect, it may be interesting to delay the last invoices of the year until the following financial year or not accept new clients until January. In this regard, it should be remembered that Personal income tax is a progressive tax; that is, it increases as profits grow. So, to calculate how much we must pay to the Treasury, there are sections of personal income tax in which we will apply a different percentage, taking into account all the incomes that are received (not only those from work).
Consequently, any new income that supposes jumping of section in the rent can cause that we pay more to the Treasury. Therefore, it may be interesting to anticipate expenses or investments (cars, computers). Many times, small amounts, they can have a great impact on.
In order not to exceed the income bracket that would force us to pay more to the Treasury, it is in our power to carry out some settings by investing in financial products or planning for retirement. These are some of the available alternatives:
The deduction for investment in habitual residence that could be practiced when filing the income statement was abolished on January 1, 2013. However, people who formalized their mortgage loan before that date can still deduct a part of the installments that they pay every month. Up to 15% can be deducted from an amortized annual maximum of 9,040 euros.
But be careful, that is the maximum, if we calculate our income, we may find out that from 5,000 euros it no longer causes any change in our tax base. This type of deduction can be achieved by adding two sections: a 7.5% state section and an autonomous section that can be up to 7.5%, although it depends on each community.
The deduction can also be practiced if the mortgage is modified in the event of early repayment (If we return the mortgage capital ahead of time, we can add that money to that which we have paid during the year with the monthly installments), in case of carrying out a creditor subrogation or in case of contracting a new mortgage to cancel the one that let us have, the same criteria would apply as with surrogacy.
Review of Social Security contributions
The freelance fee is an expense that is closely linked to the exercise of professional activity and is undoubtedly necessary to carry it out. Therefore, it is fully deductible. 86% of the self-employed contribute by the minimum base, so it may be a good decision to raise the quota to improve the future pension and pay less to the Treasury.
Pension Plans and Insured Provident Plan (PPA)
Personal income tax regulations allow the tax base to be reduced by the amount of contributions made during the year to pension plans and of the premiums paid to a PPA (Insured Pension Plan). This is an individual long-term savings insurance designed to complement the retirement pension system.
In practice, lowering the tax base within the formulas allowed by law is like “if we charge less in the eyes of the Treasury “ and therefore we should pay less tax. This reduction is limited to the lower of the following amounts: 2,000 euros per year or a maximum of 30% of net income from personal work and economic activities. But just like with amortization of mortgagesThese are the general limits and, depending on the particular case of the self-employed person, the optimal amount could be lower.
These are some of the most common for the activity of the self-employed, whose premiums are considered a deductible expense as long as the insurance is related to the professional activity.
Liability insurance is 100% deductible; life or medical insurance, provided they are related to the activity; For example, that you have requested a credit or loan to develop your activity or invest in it and the bank has forced you to contract it. Another insurance that is deductible is health insurance. In the latter case, there is a limitation of 500 euros per insured who is part of the family unit. For example, if you are 4 people in your family unit, you could deduct up to 2,000 euros.
- PIAS: the installments of the individual systematic savings plans (PIAS) are not deductible in personal income tax, but complying with a series of conditions, all the yield generated during the entire duration of the policy is exempt from paying taxes once the capital is collected .
- SIALP: a SIALP is an individual long-term savings insurance. Whoever hires it can benefit from the tax advantages of this tool, as long as the investment is maintained for a minimum of five years and does not exceed 5,000 euros per person per year. Fulfilling these requirements, the client will benefit from the tax exemption of the interests that have been generated by the SIALP. In the event of a total redemption, it must be taxed as income from movable capital.
Another way to reduce the tax base and pay less money to the Treasury is to take into account what are the deductible expenses inherent to the performance of the activity. Care must be taken when applying them, as some can be interpreted by the Treasury in the event of an inspection.
Here are some expenses with important fiscal relevance to consider before the end of the year:
- Purchase and repair of investment goods: if you acquire an asset for the development of your activity, you must bear in mind that it is an asset and not a service, and that its amount must exceed € 3,000. In the case of personal income tax, you cannot subtract the entire amount at once. The law obliges to do it little by little, what we know by the name of fiscal amortization.
- Vehicles: expenses derived from the purchase or use of a vehicle are considered deductible, both from VAT and personal income tax, when the vehicle is used exclusively for professional activity (for example, to deliver or distribute goods).
- Customer and supplier service expenses: this expense is one of those that usually generates more doubts and problems. Expenses for customer and supplier care are expenses for merchandising and gifts that are delivered on behalf of the business, such as corporate t-shirts, caps, backpacks, mugs, badges, pens or calendars. These expenses are deductible, but they can only add up to a maximum of 1% of your billing.
In conclusion, If we want to optimize our 2021 income tax return, the best advice that could be given to the self-employed would be the following: 1) Learn to calculate your own income. 2) Make a good forecast of the annual profit and personal income tax. 3) Plan sales and investments. 4) Optimize savings products. 5) Choose the best insurance. 6) Plan your Social Security quota. 7) Plan your retirement. And 8) Take advantage of the full potential of personal expenses in the development of your activity.