When you move to the Netherlands you often hear people mentioning tax deductible costs. The most common deductible costs are mortgage interest and study costs. However, there are more deductible costs and you of course do not want to miss out on deductible costs, so please continue reading this article.
How do deductible costs work?
Deductible costs reduce your taxable income, meaning that less tax is to be paid over your income.
If you work for an employer, your employer is already withholding wage tax over your total income. Your employer does not take into account tax deductible costs, this is done when filing your income tax return.
In the income tax return you will state how much deductible costs you had during the year. The income against which you set off the deductible costs was reported by your employer. Your employer already withheld the correct amount of tax for you. If you now reduce that income with deductible costs, too much tax was withheld by your employer. That amount is then being paid back to you.
What costs are tax deductible?
The most common deductible costs are:
Mortgage interest deduction
The costs related to the loan taken out to purchase your main residence are tax deductible. You can deduct the mortgage costs for the period that you live in the property.
In the year of purchasing your property, you can also deduct some of the one off financing costs, such as notary costs relating to the mortgage, mortgage advisor, translator for 50%, appraisal costs, technical inspection costs and mortgage guarantee.
Study cost deduction
Not all studies are tax deductible though. Only studies that increase your job opportunity are tax deductible. For instance, if you would like to learn Spanish so you can speak Spanish on your Spanish holiday, this is not tax deductible. Even if you are for instance planning on becoming a Spanish teacher, not deductible as the Spanish language is too generic. Jurisprudence has learned that the three types of Japanese language could result in a deduction.
The most common study cost deduction is the MBA education that costs a fortune. Please note that there is a maximum per year that you can deduct (EUR 16.000).
More importantly, after 2021 there will be no more study cost deduction. That will be replace by study cost subsidy. Currently it is unknown how this will look like.
Medical cost deduction
The medical cost deduction is a hot item in the income tax return. Till we explain the rules, that is.
The Dutch Government wants to prevent every human being, being a Dutch tax resident, to claim aspirin. Hence there is a threshold of 1% of the combined income. Combined income is your income and that of a possible tax partner.
Not deductible are the own risk amounts and the health care insurance premiums. Neither is deductible are treatments not done by a recognized doctor or recognized institute. Obviously you cannot claim costs already reimbursed by the insurance company.
Our experience learns us that the rules make most people not qualify for a deduction. In case of an deduction, the tax office always makes inquires about two years later. Then you need to show the receipts etc. Could cause an additional headache.
Charity donations are tax deductible if more than 1% of the combined taxable income is donated, with a maximum of 10% of the combined taxable income.
Church donations are for us the most common donations. Some have a monthly donation to a charity organization, but the combined donations often do not exceed the threshold.
Part of the tax return obligation is to provide the RSIN number of the charity organization. International organizations often do have a Dutch RSIN number.
When you donate to a so called ANBI (algemeen nut beogende instelling), you are allowed to deduct your donations for 125%.
For donations set via a notary five year agreement there is not threshold of 1%.
Alimony is a moral obligation to support the former married partner. Moral is good, contract is better. The Dutch tax office wants to have confirmed in a divorce agreement that the one partner is supporting the other.
Paid alimony is a deductible in the one tax return, but a taxable income in the other tax return. Hence the person deducting needs to provide correct address details etc of the partner for whom the alimony is deducted.
The problem with alimony is the house. If both partners own the house and only one partner stays in behind. This one partner can only deduct for his or her ownership the mortgage interest. Often 50%. When the divorce agreement does not state anything about the mortgage and how that is handled, 50% of the bank interest will evaporate as a deduction.
Tax is exciting
We think tax is exciting. We are also excited to claim tax deductions for you. As you might have read above. The Dutch tax office does offer deduction possibilities on the one hand. On the other hand the criteria as set such that not often the deduction can actually be used.
That is exactly the policy of the Dutch Government. The number of deductions need to be reduced, so the overall tax rate can go down as well. The Dutch tax office is good in reducing the deduction possibility. The lower overall tax rate is very slowly in progress.
My name is Kelly Postema, feel free to contact me about tax deductions.