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Averaging tax refund – How does it work and when is it applicable?

In some years, your income might fluctuate a lot in comparison to other years, for instance when you receive a bonus, vest stocks from your employer or maybe lose your job.  This means that in some years you do not reach the higher tax bracket, whilst in other years your income will be partly taxed against the higher tax brackets.

Averaging tax refund – When is this applicable?

If you have 3 consecutive years of tax returns with income that varies a lot, you might be able to average out your income over these 3 years. This means that your income will be divided over the lowest tax brackets as much as possible in order to lower the tax due.

How does it work?

Averaging tax refund is only applicable for residents, so with the P-form. If The M(iration)-form or the C(non-resident)-form have to be used, you cannot use the averaging method.

You have to file your income tax return for the 3 consecutive years. These annual income tax returns, you file regularly, so not taking the averaging into account. The tax returns needs to be finalised by the Tax authority before you can apply the averaging.

Averaging tax refund

The averaging tax refund is calculated as following:

The income of the 3 consecutive years has to be added together and then divided by 3 years. Each year will include 1/3rd of this income. Over this 1/3rd of the combined income the tax due will be calculated.

As you have already paid the taxes via the annual income tax return or via your employer through wage tax, it is expected that you will receive a refund. If the refund exceeds EUR 545, you can apply the averaging.

The averaging has to be applied within 3 years from the last finalised tax return from the Tax authority.

Example

A person has in the year 2017 EUR 45.000 income, in 2018 EUR 13.000 income and in 2019 EUR 141.471 income. This is the type of fluctuation you need. The refund for averaging out the income was EUR 7.500. We charge EUR 250 for this process.

Please note

You can only average out your income over the same year once. For instance, you have fluctuating income in 2016, 2017, 2018, 2019 and 2020. In that case, you can apply the average only once, even though there are 5 years of fluctuating income.

As you cannot use one year more than once. In cases like this, it is beneficial to calculate which averaging is the most beneficial. If for instance 2021 is another fluctuating income year, you could request averaging for 2016, 2017, 2018 and also for 2019, 2020, 2021. You cannot use the years 2017-2019 and then 2019-2021. That implies 2019 is used twice, which is not possible.

Tax is exciting

We think tax is exciting. Claiming additional tax back for you gets us very much excited. Would you like us to assist you with averaging out your income over 3 consecutive years? Feel free to reach out and we are happy to check whether you meet the requirements.

My name is Kelly Postema and I am happy to assist you.

Averaging tax refund
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