Opening of the personal income tax season

Opening of the personal income tax season 

Barbora Halousková, Jana Střelická
Opening of the personal income tax season
In connection with the upcoming tax season for the preparation of annual tax settlements and personal income tax (hereinafter "PIT") returns for 2021, we have prepared an overview of the changes you may encounter when settling your tax obligations for 2021. These and other information related to the arrival of the new year are summarized in the article below.

Abolition of the super gross wage and increasing the general tax credit for the taxpayer

As of January 2021, most employees already recognized an increase in the net wages on their pay slips, both because of the abolition of the so-called super gross wage, or more precisely, the change in the tax base for the calculation of payroll tax, which included employer´s contributions to social security and health insurance until the end of 2020, and because of the increase in the general tax credit for the taxpayer from CZK 24,840 to CZK 27,840.  In the following year 2022, there is a further increase of the general tax credit by CZK 3,000 to CZK 30,840, i.e. from January 2022 the taxpayer will be able to apply a credit of up to CZK 2,570 in the calculation of the monthly payroll tax.

Solidarity tax replaced by progressive income tax

The 7% solidarity tax which applied if the annual income from employment and profit from self-employment activity exceeded the maximum annual assessment base for social security contributions (i.e. CZK 1,672,080 in 2020) is also abolished since 2021.

The abolition of the solidarity tax is replaced since 2021 by the introduction of progressive taxation, which will apply to all income of the taxpayer, with a 15% rate on the part of the tax base up to CZK 1,701,168 (CZK 1,867,728 for 2022) and a 23% rate on income above this threshold.

Tax credits

Several changes have also been adopted in 2021 to the tax credit for dependent children. A dependent child is considered the child living in a joint household with the taxpayer. However, as a result of the transitional provisions of the Income Tax Act (hereinafter "ITA"), these changes will not be applied in practice until 2022. The changes concern the following points:

  1. increasing od the tax credit for the second, third and each next child,
  2. abolishing the threshold for the annual amount of the tax bonus when claiming the tax credit,
  3. more strict conditions for eligibility to tax bonus.

Ad 1) The increase relates to the tax credit for the second, third and each next dependent child, i.e. the annual amounts are as follows:

  • for the first dependent child the amount remains at CZK 15,204,
  • for the second child the amount increases from CZK 19,404 to CZK 22,320,
  • for the third and each next child the amount increases from CZK 24,204 to CZK 27,840.

And here, as a result of the transitional provisions, the original wording - i.e. the lower tax credit - was applied when calculating payroll tax during 2021. Thus, although the increase in the tax credit was already approved as of 1 July 2021, in practice the increase will only be reflected in the annual tax settlement or tax return for 2021.

Ad 2) As of 1 January 2021, the maximum limit for the annual amount of the tax bonus, which was CZK 60,300 per year until the end of 2020, has been abolished. Here again, according to the transitional provisions, the maximum threshold for the monthly tax bonus of CZK 5,025 for 2021 was maintained and the change was not applied in the payroll tax calculation during 2021. Since January 2022, this monthly threshold will also be abolished, and the amount will not be limited in any way.

Ad 3) According to the original conditions, the tax bonus (i.e. if the child tax credit is higher than the tax liability) could be applied provided if the taxpayer had income from Section 6-9 of the ITA in the amount of at least six times the value of the minimum wage, and furthermore, if s/he had income according to Section 9 ITA, these costs must not have exceeded income. Under the new rules, income from Section 8-9 of the ITA, i.e. capital income and rental income, is not included in this six times the minimum wage.

It also applies that the monthly tax bonus may be paid if it amounts to at least CZK 50 and the total of employment income for the relevant calendar month amounts to at least half of the minimum wage.

If the taxpayer has not reached the annual limit of six times the minimum wage, but in some months has reached at least half of the minimum wage, the taxpayer is entitled to receive the tax bonus only in those months, not for the whole year.

Deduction of donations

A temporary increased threshold for claiming donations to non-profits and other entities of up to 30% of the tax base can be used for 2021.

Lump-sum tax

New conditions apply for the application of the so-called lump-sum tax for self-employed persons since 2021. If the conditions are met, the self-employed person can settle income tax and insurance obligations by making one payment each month to the bank account of tax office, which includes tax, social security contributions and health insurance contributions.

Further information on the conditions and other context to the 2021 lump-sum tax can be found here.

Attention! Those interested in registering for the lump-sum tax for 2022 can only do so until 10 January 2022.

The conditions for entry into the lump-sum tax regime remain the same as in 2021, but for 2022 the monthly payment increases to CZK 5,994, namely:

  • the tax remains at CZK 100,
  • the social security contribution increases to CZK 3,267,
  • the health insurance contribution increases to CZK 2,627.

If you registered into the lump-sum tax already in 2021, the deadline for the first payment of 2022, i.e. for January, will be 20 January 2022. In case you registered for the lump-sum tax starting 2022, the due date for the January payment will be the same as for the February payment, i.e. 21 February 2022 (the following working day after the 20th of the month).

Changes in respect of ownership of immovable property

As many of you have noticed, the tax on the acquisition of immovable property has been abolished. However, there have also been other changes in connection with this law amendment, please find below:

For mortgages concluded as of 1 January 2021, the maximum amount of the deduction of interest paid on a mortgage or building savings loan used to finance housing needs from the tax base is decreased from the original CZK 300,000 to the current CZK 150,000.

Simultaneously, the time test for the exemption of income from the sale of immovable property not used for housing need of the taxpayer has been extended from original 5 years. Immovable property acquired as of 1 January 2021 will have to be owned for at least 10 years (on the other hand, income from the sale of such property can be exempted even if the length of ownership is not met, but the proceeds of the sale are used to finance one's own housing needs, provided that the tax authorities are notified of this fact).

Minimum wage increase

In conclusion, we would like to inform you that based on a government decision the minimum wage will be increased from CZK 15,200 to CZK 16,200 since 1 January 2022.

As many of the limits in the ITA are linked to the minimum wage, the increase also has tax implications. Specifically, the following amounts will apply to taxation for individuals in 2022:

  • The eligibility to a monthly tax bonus arises when the employee's income in a given month is at least half the minimum wage, i.e. at least CZK 8,100 (in 2021 it was CZK 7,600).
  • The eligibility to an annual tax bonus arises when the annual income from employment and self-employment activity is at least six times the minimum wage, i.e. at least CZK 97,200 per year (in 2021 it was CZK 91,200).
  • The tax credit for the placement of a child (kindergarten / pre-school fee) will be up to CZK 16,200 per child per year (in 2021 it was CZK 15,200).
  • The threshold for exemption of regularly paid pensions is 36 times the minimum wage, i.e. CZK 583,200 per year (in 2021 it was CZK 547,200).

Finally, the increase in the minimum wage will also have an impact on the payment of health insurance contributions for persons without taxable income, which will newly amount to CZK 2,187 per month (in 2021 it was CZK 2,052).

Hope we have provided you with useful information in this article. However, if the area of tax return preparation is all Greek to you, do not hesitate to contact our tax specialists.

Tax Advisory

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Jiri Sindelar
Jiří Šindelář
Tax Director