As of 1 January 2019, the withholding tax will be the method of recovery of income tax. A real reform that savvy taxpayers can prepare to make the most of it. However, what does this withholding tax consist of? Who will be the winners and the losers this revolution? What are the pitfalls to avoid ? How will confidentiality be preserved? Which rate to choose? Here are some answers.
Collection at source: what is it?
In contrast to this method of collection, the withholding tax consists in directly deducting the income tax at the time of the payment of the taxpayer’s income. This method of recovery of the IR is thus based on a monthly payment taken directly from the taxpayer’s wages and other income.
Withholding tax concerns almost all income (wages, unemployment benefits, retirement pensions, etc.), with the exception of savings income (interest, dividends) and real estate gains whose tax will always be recovered by the notary responsible for the sale of the property.
This new method of collecting income tax (IR) will thus allow the tax administration to collect the tax for the current year at the time the income is collected. As a result, the intervention of a third-party payer is essential. The latter may be the employer if the taxpayer is an employee, the employment center if he is a jobseeker or the pension fund if the taxpayer is retired.
With the mode of recovery of the income tax still in force, the taxpayer is taxed each year on the income collected during the previous year. This method of payment of the income tax (IR) is based either on the monthly levy, or on the payment by estimated third, or on the payment at maturity, but the taxpayer still pays the tax in year N on income earned in year N-1. As a result, there is always a lag that can last up to 10 months.
Withdrawal at source: winners and losers
If the amount and rate of income tax will remain almost identical for most taxpayers, the entry into force of the withholding tax as of 1 January 2019 will certainly make a few winners but also losers.
In order to prevent French taxpayers from paying twice the income tax (IR) next year for income earned in 2018 and 2019, the year 2018 will be considered a blank year by the tax authorities. In other words, certain income should not be taxed for the year 2018. As a result, taxpayers will pay in 2018, the taxes corresponding to their income received in 2017 and in 2019 they will pay those corresponding to the revenues of 2019.
However, other income collected for the year 2018 will be taxed, these are severance pay, termination benefits, retirement benefits in the form of capital, profit-sharing, dividends, the aid received in case of reintegration or retraining.
With this tax game, some taxpayers will win, it is those who start working this year (they will benefit from a few months of untaxed income), those who will retire this year (they will not see their income collected in 2018, since the 2019 tax will be levied directly on their retirement). Taxpayers who will leave France at the end of 2018 to settle in another country will also be the big winners of this reform (the classic incomes of 2018 will not be taxed). Heirs in the case of a death will also benefit from the withholding tax.
On the other hand, young people who will start working in 2019 are potential losers since they will have to pay their taxes as of their year as employees and not at the end of a year. Taxpayers who are unemployed or on leave in 2018 will not benefit from the withholding tax because they will not benefit from the tax cut related to the decline in their income. High taxpayers and those subject to double taxation will lose out with the withholding tax.
2019 income tax: what are the pitfalls to avoid?
The implementation of withholding tax may complicate the task of many taxpayers and lead them into error. In fact, if the withholding tax will not apply to capital gains, you should know that any credits or tax reductions will not be considered by the new scheme. These will continue to apply with one year lag, except in some cases as personal services.
Moreover, despite the tax levy at the time of the payment of income, the taxpayer must always declare his income, that is to say, complete an annual declaration of resources. This annual return will allow the calculation of tax on all other income that will not be withheld at source. The levy rate will also be known at the end of this declaration.
As 2018 is a year of transition or a blank year, the withholding tax may contain a trap for certain retirement savings products that qualify for a tax deduction on taxable income. In fact, even though 2018’s current income will be offset, you must pay your retirement savings account at least as much in 2018 as in 2017 and even in 2019 to be able to deduct all of your premiums from your income.
Namely that for various reasons, some taxpayers may have to waive certain expenses or postpone them until 2019. However, certain expenses paid in 2018 will still be eligible for a tax credit or deduction. These include home-based employment, union dues or energy renovation work in his main residence.