What is ‘income averaging’ and how does it work?
Has your annual income gone up and down quite a bit over the past three years? Oh, then surely you know the term income averaging. No? In that case, read on quickly, because income averaging could get you a tax refund! That way you’ll keep some pennies in your pockets. Be careful though, because as of January 1st, this rule expires, meaning you can only do it over the 2022, 2023 and 2024 period.
Imagine your income has fluctuated a lot over the past three years. You earned more in one year and less in the next. With income averaging, you can calculate the average income for those three years. For example, if you earned €0 the first year, €40.000 the second, and €50.000 the third, the average is about €30.000. The tax authorities will look at that amount.
Then the tax authorities start working. How much tax should you pay if only that average (€30.000) is considered? In other words, they’re going to recalculate your taxes. Would you have paid less taxes if your income in those three years had been €30.000 (the average) instead of the fluctuating incomes?
After this, there are two possible paths. Following this new calculation, a lower amount could come out than what you actually paid. In that case, you are probably entitled to a tax refund if the refund is higher than the threshold of €545. It doesn’t happen often, but it could be that a higher amount could also come out. Does that mean you have to pay extra taxes? No, don’t worry!
So, just a quick recap of all the information. How exactly does income averaging work? Income averaging has the following three steps:
- Your average annual income for the past three years is calculated.
- The tax authorities recalculate your taxes (what the taxes would have been if you had the average as your annual income each of the past three years).
- Do the new taxes come out lower than what you’ve already paid? Then you’ll most likely get a refund if the refund is higher than €545.
We are happy to help!
Hopefully you now have a better understanding of what people mean by income averaging. Are you still a bit nervous about doing it all yourself? Taxes remain a tricky subject for many, all those numbers and rules. We at the Tax Savers totally understand that. Luckily, we know all the rules all too well and are happy to help you. So please fill in the contact form or call us at 020-217012 and let’s figure it out together.
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