Completing your tax return in Luxembourg

Completing your tax return in Luxembourg

What can I do with my insurance premiums to reduce my taxable income?

Completing your tax return is not always an easy business. Some insurance premiums are tax deductible; these premiums are called "Special Expenses". Through these four videos, we will explain to you what deductible premiums are, where to declare them, and the tax benefit that you can receive for them.

1. Tax deductibility of premiums arising from public liability insurance

Public Liability Insurance (PL) is mandatory in some cases and strongly recommended for others.

It is:

  • Mandatory for motor vehicle PL
  • Strongly recommended for personal PL

The amounts paid to cover these risks are tax deductible under article 111 LIR.

These amounts must be reported in table B. b) of page 13 in your tax return.

Let us take, as an example, the Schmit family, a Luxembourg household with a total taxable income of €82,000 which is taxed at €11,450.

Let us suppose that there is a premium for motor vehicle PL of 750 Euros and a premium of 65 Euros for personal PL making a total deductible amount of €815, this amount will lower the tax base and income on which tax will be calculated, now amounting to a total of €81,185.

Now, tax due totals €11,161, constituting a tax gain of €289

2. Tax deductibility of premiums paid for life insurance?

Article 111 LIR provides for a maximum tax deductible limit of €672 for each member of the household.

In this context, other kinds of insurance premiums may be deductible in your Luxembourg tax return pursuant to article 111 LIR, in particular:

  • The Kid's Plan, the savings solution and provident insurance for your children.
  • The Life Plan, the tailor-made savings solution and provident insurance that suits your needs.
  • The Outstanding Balance for periodic premium amounts, a solution for covering a mortgage.

To take the situation of Mr and Mrs Schmit, proud parents of 2 children. Because of the maximum deductible of €672 per individual, they may therefore deduct 672x4, giving €2,688.

Let us suppose there are two Kid's Plans with a total value of €1,200 and a Life Plan with a total value of €2,200 to which should be added €815 relating to the PL insurances previously mentioned. The €2,688 has been reached and may be declared in full.

The amount will decrease the tax base and the income on which tax will be calculated, now reaching an amount of €79,312.

Now, tax due totals €10,548, constituting a tax gain of €902.

3. How to fill out your insurance premiums for your "Retirement Provision" insurance policies?

It is also important to think about your future. Anyone who moves from an active occupation to enjoy a well-deserved retirement will experience a deficit in terms of income.

It is possible to address this deficit by taking out, for each adult in the household, a Pension Plan (the "Retirement Provision" solution) which will make up the difference.

The premiums of your Pension Plan are also deductible from your taxable income under article 111Bis LIR.

The amounts of your premiums should be reported in page 14 of your tax return, on the "Special Expenses" sheet, box 1, large D.

In our example, Mr and Mrs Schmit are aware that the Luxembourg state pension system, managed by the Caisse Nationale d'Assurance Pension (National Pension System), might at any time be less "generous" than at the present.

Wanting to plan ahead, they both have taken out a "Pension Plan" life insurance for a total amount of €3,200 per annum.

This total of €6,400 is added to the €2,688 previously mentioned.

The total taxable income of €82,000 minus the deductible amount of €9,088 gives a new taxable income of €72,912

Annual income tax which initially totalled €11,450€ now stands at €8,567, which constitutes a tax saving of €2,883.

4. Outstanding insurance balance paid as a single premium as a deductibility tool

Funding a property investment through a mortgage is commonplace. This is why it is important to think about the outstanding Insurance Balance to cover your loan and not to leave your loved ones with an insurmountable repayment bill.

As seem in point 2 above, periodic premiums for an outstanding Insurance Balance are deductible from taxable income under article 111 LIR. Single premiums for an outstanding Insurance Balance receive preferential treatment from the Tax Authority. Effectively, depending on the family situation, the age of policy holders, and the number of children in their care, the minimum set deductible stands at EUR 6,000.

In our example, the Schmit family decided to buy a new house during the previous tax year, which they funded with a mortgage. And as they wanted to be prepared for every contingency, they covered the loan repayment with an outstanding insurance balance with a single premium.

Mr Schmit is 32 years old and Mrs Schmit is 29 years old. In accordance with their age and as they have two children, they may deduct:

  • For Mr Schmit, 32 years old, (to whom we are going to assign the two children) the amount of €9,744
  • For Mrs Schmit, 29 years old, the amount of €6,000

For a maximum total deductible limit of €15,744.

The outstanding insurance balance that they have paid stands at €11,556. This falls within the maximum deductible, which consequently allows them to deduct all of the amount paid.

 

For a summary of the actions taken or to be taken for Mr and Mrs Schmitt, please consult section 5.

5. To summarize, which items are tax deductible?

To summarize, your insurance premiums are now deductible from your Luxembourg tax return, under article 111 LIR and 111Bis LIR.

Thus the following are deductible:

  • Your Public Liability premiums (Article 111 LIR)
  • Your Personal Insurance liabilities (Article 111 LIR)
  • Your Outstanding Balance with periodic payments (Article 111 LIR)
  • Your Retirement Provision insurance (Article 111Bis LIR)
  • Your Outstanding Balance with a single payment (Article 111 LIR)

The case of Mr and Mrs Schmit

To finish our example: the initial taxable income of €82,000 becomes, after deductions of:

  • PL and Life Insurance premiums; €2,688
  • Retirement Provision insurance; €6,400
  • Outstanding balance with one premium; €11,556

At €61,356

With this income of €61,356, tax owed stands at €5,529. We therefore go from €11,450 of tax to €5,529, representing a tax gain of €5,921.