The time for submitting personal income tax return for the year 2016 is approaching, slowly but surely. When drawing up the tax return, it is necessary to take into account a number of changes valid from the year 2015, which relate to the taxation of persons. In this article, we will focus on the most significant ones, which will affect the highest number of taxpayers.

The change that will probably affect the highest number of taxpayers, is the increase of the child tax credit for the second and third child, or further children. The tax credit for a second child has been increased by CZK 200 per month, as of January 1, 2015, and for a third child and all other children by CZK 300 per month. For the year 2015, a taxpayer can thus apply a tax credit in case of a second child reaching up to CZK 15,804, and for all other children even up to CZK 17,004.

There has also been a slight increase of another tax credit, which relates to a dependent child. This relates to the discount for placing a child in a pre-school facility, the “nursery-school fees”. The discount can be applied by a taxpayer, with whom a dependent child that has been placed in a pre-school childcare facility including a nursery school, under the school act, is living in a common household. This may typically be a state, corporate or private nursery school, a private infant school or a child centre. Last year, when the discount was first introduced, it was possible to apply the actual expenditure (excepting subsistence expenses and extracurricular activities) up to CZK 8,500, but for the year 2015 it is possible to apply a discount of up to CZK 9,200 for every dependent child.

For the year 2015, a significant change in expenditure flat-rates has also occurred. For the income from farming production, forestry or water management and in the case of income from the craft industry, for which a flat rate of 80 % remains, and in the case of income from entrepreneurial activities other than crafts, for which a flat rate of 60 % remains, there has been a unification with other expenditure flat-rates, meaning that the given rate can be applied in full only for income reaching a maximum of CZK 2,000,000. Entrepreneurs applying flat rates for their expenditure (with the exception of extra earnings) still cannot subtract child tax credit or a spouse tax credit from their taxes.

A change has also affected the taxation of income of authors for contributions to newspapers, magazines, radio or television coming from sources on the territory of the Czech Republic. This income represents a separate tax base for taxation carried out by means of a withholding tax. A limit of CZK 10,000 is currently set for this purpose. Such income is not included in the tax statement anymore.

There are newly stricter conditions for tax advantages for life insurance. The sum, which can be subtracted from the tax base in a tax statement, remains the same (CZK 12,000 at maximum), but the conditions, under which such a paid sum can be subtracted, have changed. The new condition is that the concluded contract should not enable extraordinary withdrawals of money.

For working pensioners, the basic discount per taxpayer has been reintroduced directly into the income tax act. On the other hand, the application of a stipulation has been resumed, according to which regularly paid pension will be taxed, if the pensioner has an income from employment and partial tax bases from self-employment and rent totalling more than CZK 840,000.

People, who have an active data box, should take great care. A new duty to submit all tax statements (as well as other obligatory announcements to the tax administration) in electronic form applies to them. Compared to the previous year, no exception applies to them anymore, and it is thus necessary to directly observe the format prescribed by the tax administration.

Beginning with the income for the year  2015, people newly have to announce even income that is exempted from taxes to the financial authority, if it exceeds five million korunas. 

A practical example

Mr Novák has his own business as a self-employed person. For the year 2015, he posted profit (income minus expenditure) of CZK 840,000. He has four children in total, with his wife, whom he divorced in the year 2012. One of the children lives with his former wife, three others at the age of 3, 5 and 12 years life live with Mr Novák. The two youngest children attend a private pre-school facility, where Mr Novák pays CZK 10,500 for each child, the eldest attends a primary school. For the year 2015, Mr Novák also paid contributions to his own additional pension insurance reaching a total of CZK 42,000 and life insurance reaching CZK 18,000 and has updated his contract so as to fulfil the conditions for tax credit for the year 2015, too.

SOLUTION

(840 000 – (12 000 + 12 000))*0,15 = CZK 122,400

122 400 – (24 840 + 46 212 + 18 400) = CZK 32,948

Mr Novák cannot apply tax credit for the fourth child, because the child lives with its mother. Although he pays CZK 10,500 per child in the pre-school facility, a discount of only up to CZK 9,200 can be applied at maximum. In the case of life insurance and additional pension insurance, Mr Novák applies the maximum sum, which is CZK 12,000 in both cases.