Tax Deductions and Personal Income Tax

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Tax Deductions and Personal Income Tax

by | Wednesday, 11 May 2022 | Personal Income Tax

Generally speaking, those qualifying as residents, for tax purposes, in the Autonomous Region of Madeira (or any part of Portugal) are entitled to tax deductions based on some of the expenses they incurred and provided the invoices concerning these expenses hold their Portuguese taxpayer identification number (NIF).

Tax deductions

Currently, the tax deductions and expense limits allowed are the following:

General family expenses: All expenses that do not fall under the deductions for education, health, real estate, nursing homes, alimony and invoice requirements come under this deduction. These are essentially day-to-day expenses: water, electricity, gas, telecommunications, supermarket, fuel, clothing and footwear, household appliances, furniture, travel, etc. 35% of these expenses can be deducted from the personal income tax due, up to a maximum limit of 250 euros per taxpayer. A couple deducts 500 Euros.

VAT deduction by invoice requirement: Asking for an invoice in specific sectors of activity gives the right to a tax benefit, corresponding to the deduction of a percentage of the input VAT: 15% in car and motorbike repair costs, accommodation and catering, hairdressing, veterinary activities and gymnasiums and 100% in monthly public transport passes.

Health: Health expenses allow for a personal income tax deduction, regardless of the VAT rate. It is possible to deduct 15% of the amounts paid, up to a maximum limit of EUR 1,000 per household in this category.

The deduction of health expenses covers a wide range of expenses. Consultations, surgical interventions, hospital stays, treatments, medication, prostheses, orthodontic appliances, eyeglasses (including frames) and health insurance are some examples.

With VAT at 22% (23% in the Portuguese mainland), health expenses must have a medical prescription. It is necessary to associate this prescription to the respective invoice within the Portuguese Tax Authority’s web portal.

Properties: interest expenses from credit contracts for the purchase of permanent housing entered into before 2011 are deductible. Whoever has contracted a housing loan for the same purpose at a later date is not entitled to this deduction. The same applies to those who signed a housing loan agreement until 2011 and transferred it after that date.

The interest expense on home loans can be deducted at 15%, with a maximum limit of 296 euros. For those on lower incomes, the deduction can be increased up to EUR 450.

It is also possible to deduct rental expenses from one’s income tax, provided that the rented house is for permanent housing purposes and that the rental contract has been entered into under the Urban Rental Regime or the New Urban Rental Regime. This deduction may be increased for lower-income earners, up to 800 euros. Under this rule, 15% of the amount spent on rents, up to 502 euros.

Education: Almost all expenses related to school activities can be deducted from one’s personal income tax: monthly fees for schools, kindergartens and nursery schools; school fees; textbooks and textbooks; tutoring; meals; transportation; accommodation for displaced students; and school supplies including uniforms (if purchased at school).

It is also possible to deduct expenses related to the rents paid by displaced students. Displaced students are all those who are under 25 years of age and who attend an educational establishment more than 50 km away from their permanent residence. To deduct these expenses from the personal income tax, it is necessary to have a rental contract. In addition, the landlord must register the rental agreement on the Tax and Customs AUthority web portal and indicate on the rent receipts that the amount paid is for the displaced student’s rent.

The deduction of education and training expenses allows 30% of the contemplated costs to be discounted from the collected personal income tax, up to 800 euros, per family. To reach this limit, it is necessary to present expenses of 2667 euros. However, if there are expenses for rents of displaced students, the maximum ceiling of the deduction of education and training expenses may rise to 1 000 euros. But it is necessary that the difference between this special limit (1000 euros) and the general limit (800 euros) is due to those expenses. A maximum of 300 euros can be deducted from rent.

There are also benefits for families with students enrolled in educational establishments located in the country’s mainland interior. These families can deduct 40% of training and education expenses, up to 1000 euros.

Elderly Homes: expenses with home support, nursing homes and other institutions that support the elderly of the taxpayers (taxpayer and spouse), as well as expenses with nursing homes and autonomous residences for disabled people, dependents, ascendants and collaterals up to the third degree that does not have an income higher than the national minimum wage. 25% of the expenses can be deducted with a maximum limit of 403,75 euros.

Alimony: Those who pay alimony fixed by court decision or agreement may deduct 20% of the amounts paid and not be reimbursed by the Portuguese Tax and Customs Authority. Alimony payments may be granted in favour of adult children, adopted children, stepchildren and civil godchildren, and those subject to guardianship until they reach the age of majority.

Essential notes on tax deductions

Deduction only with payment of personal income tax: Taxpayers who do not pay personal income tax cannot deduct any expenses. Deductions are tax deductions; therefore, there can be no deduction if there is no tax payment.

Deduction up to the collection: It is also impossible to deduct expenses in an amount higher than the tax payable. Should you not be liable to pay taxes in Portugal, you will not be able to deduct your expenses.

The overall limit is what counts: You should also keep in mind that there is an overall limit for several expense deductions: education, health, real estate, nursing homes, alimony, VAT deduction by invoice requirement and tax benefits (not mentioned in this article). It is this limit that counts and not the sum of the individual limits of the said deductions.

The overall limit is calculated based on a mathematical formula and may vary between a minimum of EUR 1 000 and a maximum of EUR 2 500. The ceiling is higher the lower the household income. Families with three or more children are entitled to an increase of 5% of this limit.

This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind.

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