Tax rates and Irpef calculation: from brackets to deductions, this is how the measure works – GUIDE

Revenue Agency press release of 18 February 2022:

New Irpef and abolition of Irap for natural persons carrying out commercial activities and arts and professions Clarifications from the Revenue in a circular

Withholding agents who have failed for technical reasons to apply the new rules on Irpef taxation on time will be able to adapt by April, making an adjustment for the first three months of 2022. This is one of the clarifications contained in circular no. 4/E of the Revenue Agency, which provides information on the news relating to the taxation of Irpef and the exclusion from Irap for natural persons carrying out commercial activities, arts and professions, as provided for by the latest Budget Law (L . no. 234/2021). The practice document focuses on changes to tax rates and brackets, on the reformulation of deductions from employment and similar, from pension, from self-employment and other income, as well as reporting some examples and simulations of practical cases.

How does the personal income tax change? – The new personal income tax, as amended by the 2022 Budget Law, is remodulated to 4 rates instead of 5 (23%, 25%, 35%, 43%). Therefore, the second tax rate for incomes from 15,001 to 28,000 euros is increased from 27% to 25%, and for incomes up to 50,000 euros from 38% to 35%, while higher incomes are taxed at 43%, with the abolition of the old rate of 41%.
The circular provides useful indications on the obligations of withholding agents and taxpayers, even without a substitute. Those who have failed to adapt payroll processing software in time, for example, will be able to apply the regulatory changes by April 2022, with an adjustment for the first three months of the year.

Subjects excluded from the application of Irap – The document of practice specifies that the subjects excluded from the application of Irap include natural persons carrying out commercial activities and holders of business income (art. 55 Tuir) residing in the territory of the State. Natural persons exercising arts and professions are also outside the perimeter of the tax (art. 53, paragraph 1 TUIR). On the other hand, natural persons exercising arts and professions in an associated form remain subject to IRAP.

The Irpef rates have changed since 1 January 2022: the intention of the Legislator is to compress the brackets and reduce the rates of the medium-low brackets. But local authorities will have until March 31 to adjust the surtaxes to the new 4-rate system.

In fact, the new IRPEF rates (and brackets), effective from 2022should be as follows:

1) from 0 to 15,000.00 euros: 23%;

2) from 15,00.01 to 28,000.00 euros: 25%;

3) from 28,000.01 to 50,000.00 euros: 35%;

4) from 50,000.01 euros onwards: 43%

Ultimately, the penultimate bracket stops at 50 thousand euros instead of 55 thousand euros, the bracket 55 thousand – 75 thousand euros currently taxed at 41% disappears and the two intermediate rates of 27% and 38% are reduced, respectively, to 25% and 35%.

The new rates therefore entered into force on 1 January 2022, but local authorities will have until 31 March to adapt the surtaxes to the new 4-rate system.

The average discount is 264 euros per year. But time is needed to adjust the payroll software and the concrete effect will only arrive in March when there will be the adjustment also for the previous two months.

The old personal income tax systemenvisaged the traditional rates for income brackets: these are 5 rates which correspond to the same number of income brackets, namely:

---

Average reduction of 264 euros for 27.8 million taxpayers

The tax reform that will take effect in 2022 will lead to an average levy reduction for 27.8 million taxpayers of 264 euros but the advantage will be greater for medium-high incomes, those between 42,000 and 54,000, who will have to pay the Treasury 765 euros less on average. The calculation comes from the Parliamentary Budget Office which in a Flash study underlines that 14.1% of resources are concentrated in this more affluent bracket which is equal to 3.3% of taxpayers. In fact, this is the audience that did not benefit from the so-called Renzi bonus (which was completely exhausted at 40,000 euros of income) and in part benefits from the reduction in the rate from 38% to 35% (up to 50,000 euros while between 50,000 and 55,000 goes directly to 43%). In fact, underlines the study, executives will have a tax cut of 368 euros, more than double, in absolute terms, the average of workers, equal to 162 euros, while office workers will have a tax cut of 266 euros.

The impact of the reform on individual taxpayers

The study analyzes the impact of the reform also by looking not at individual taxpayers but at the family unit, clarifying that 20% of the poorest families are “substantially excluded” from benefits due to fiscal incapacity. In practice, 50% of households in the least favorable economic condition “benefit from about a quarter of the total resources (about 1.9 billion), while the richest 10% benefit from more than a fifth of resources (1.6 billion)” . 20% of families in less favorable economic conditions are in fact excluded from the scope of application of Irpef due to the high level of minimum taxable incomes and therefore are not involved in the revision of Irpef. “This implies – explains the Upb – that if future social policies want to further support the incomes of the poorest families, they will have to rely on instruments other than Irpef, such as direct monetary transfers or negative tax mechanisms”. According to Upb estimates, when fully operational, all of the interventions lead to a reduction in the levy of about 264 euros on average per capita (about one per cent of disposable income) for 27.8 million taxpayers, equal to about two thirds of the total.

The total charge, estimated at 7.3 billion when fully operational, does not differ significantly from the estimates given in the Technical Report (approximately 7 billion). On the other hand, the tax change is indifferent for over 14.5 million taxpayers, while there is a tax increase for around 372,000 individuals, on average equal to 188 euros per capita, for a total of 70 million euros. But it must be remembered that there is a safeguard clause which only concerns those who had the Irpef bonus activated by Renzi, therefore with low incomes. Indeed, for incomes up to 15 thousand euros, the Renzi bonus of 100 euros remainsThat it remains, at least in part, even up to 28 thousand euros to prevent someone from losing out with the mix of the new Irpef, deductions and bonus absorption.

Income tax deductions

In terms of overall burden, the redesign of the rates and brackets represents the predominant intervention which absorbs around 79% of the resources distributed (5.8 billion) while the remaining 21% (1.5 billion) is equally divided between the redesign from the deductions for dependent work and that of deductions for pensioners and the self-employed. In front of one average tax reduction for subjects who have an advantage of 264 euros, for about half of them the benefit is less than 185 eurosWhile one taxpayer out of 8 (12.5 per cent) benefits for more than 500 euros.

For taxpayers with an income of less than 12,000 euros, the average benefit is significantly reduced due to the fiscal incapacity. The first two income classes, where around 36.9% of taxpayers are concentrated, benefit from around 6.7% of total resources (around 500 million). The Uil underlines that the Upb estimates “debunk” the tax reform launched by the Government and confirm the union’s analysis “on the inequity and ineffectiveness of the intervention”. “85% of workers and pensioners, affirms the confederal secretary Domenico Proietti – receives only a few crumbs. Uil will continue in its battle for a real tax cut for employees and pensioners and for an epochal turning point in the fight against tax evasion”.

The new system of deductions for work

The current structure of deductions for work remains standing, which are distinguished according to the “type” of work and, precisely:

– deductions for employee work;

– pension deductions;

– deductions for other types of income (self-employment, business, other income).

The new amounts can be summarized as follows:

1) Deduction for employee income (art. 13, paragraph 1, letter a), b) and c) Presidential Decree no. 917/1986):

– for incomes over 28,000 euros and up to 50,000 euros: 1,910*((50,000-total income)/(50,000-28,000))

– for incomes over 50,000 euros: 0

This amount increases by 65 euros for incomes from 25,000 euros to 35,000 euros.

2) Deduction for pension income (art. 13, paragraph 3, letters a), b) and c) Presidential Decree no. 917/1986):

– for incomes up to €8,500: deduction of €1,955 (not less than €713);

– for incomes over 8,500 euros and up to 28,000 euros: 700+(1,955-700)*((28,000-total income)/(28,000-8,500))

– for incomes over 28,000 euros and up to 50,000 euros: 700*((50,000-total income)/(50,000-28,000))

– for incomes over 50,000 euros: 0

This amount increases by 50 euros for incomes from 25,000 euros to 29,000 euros.

3) Deduction for other income (art. 13, paragraph 5, letters a) and b) of Presidential Decree no. 917/1986):

– for income up to €5,500: deduction of €1,265;

– for incomes over 5,500 euros and up to 28,000 euros: 500+(1,265-500)*((28,000-total income)/(28,000-5,500))

– for incomes over 28,000 euros and up to 50,000 euros: 500*((50,000-total income)/(50,000-28,000))

– for incomes over 50,000 euros: 0

This amount increases by 50 euros for incomes from 11,000 euros to 17,000 euros.