What is tax deduction in simple words: 5 steps

The salary of an employee is much higher than he receives in his hands. After all, a tax is withheld from the wages of each working person in favor of the state. There is not enough money, and they do not pay the full amount. But how great it would be if nothing was withheld from us. By the way, there is a legal way that allows you to recover part of the tax paid, and in some cases all of it. This method is called a tax deduction. What is it in simple words? Let's find out.

In the article, we will consider what a tax deduction is and how to get it for treatment, education, when buying an apartment, for a child, for IIS, for interest paid on a mortgage, and in other cases.

Tax deduction what is it in simple words

Every working person in our country pays income tax. It is called personal income tax or personal income tax. It is levied on all income that a person receives. And from wages, and income from the sale of stocks, bonds and other items. The standard tax rate is 13%, although there are incomes that are subject to a higher tax. For example, winning a cash prize in the “Buy a candy and win a million 🪙" promotion.

All these taxes go to the federal budget, and then they are spent on improvement, the payment of benefits, salaries to public sector employees and other state needs. Fortunately, in certain cases it is possible to get a refund of the tax paid. The article will consider cases in which this is possible. The tax legislation provides extensive opportunities for this. So let's learn how to use them.

It must be remembered that citizens whose income is taxed at a rate of 13% can apply for a tax deduction. That is, they are officially employed. When submitting documents for deduction, it is necessary to confirm the fact of payment of personal income tax. This is a kind of stimulating program of the state to suppress the payment of wages in "envelopes" and transparent business.

A tax deduction is an amount that reduces the amount of income (the so-called taxable base) of the taxpayer from which the tax is paid. Also, a tax deduction is understood as the return of a part of the previously paid tax on the income of an individual, for example, in connection with the purchase of an apartment, the cost of treatment, training, and so on.

The tax deduction is regulated by the State Tax Code (TC RF).

Who is entitled to a tax deduction

The right to receive a tax deduction arises for citizens after a calendar year. You can apply for a tax deduction at any time throughout the year. We recommend that you file a tax return immediately after becoming eligible for it. That is, at the beginning of the year. For some types of deduction, the right to receive it is retained for 3 years, and for some – 10 years. This will be discussed later in the article.

Tax deduction what is it in simple words

Keep the following in mind when deciding when to apply for a deduction:

1. 1. 1. Tax checks the submitted documents within 3 months;
      2. After checking and making a positive decision on the return, the payment occurs within a month.

Thus, at least 4 months will pass from the moment of submission of documents for deduction to the moment of receipt of funds in the account.

Keep in mind that the refund is not made for the entire amount of expenses within the declared deduction, but only in the amount of the previously paid tax. For example, if a tax in the amount of 20'000.00 🪙 was paid for the tax period, and a deduction declaration is made in the amount of 25'000.00 🪙, then only 20'000.00 🪙 will be confirmed for reimbursement.

Citizens who are exempt from paying personal income tax cannot claim a tax deduction. These categories include:

1. 1. • The unemployed who have no other income than unemployment benefits.
      • Individual entrepreneurs using a special tax regime.

Variety of tax deductions

According to the current tax legislation, deductions are divided into 5 types:

1. 1. 1. Standard tax deductions
      2. Social tax deductions
      3. Investment tax deductions
      4. property tax deductions
      5. Professional tax deductions

Standard tax deductions

The peculiarity of the deductions belonging to this group is that they are applied every month. That is, a certain amount is deducted from the monthly income, on which tax is not withheld.

Citizens who are entitled to more than one standard tax deduction can take advantage of the maximum deduction allowed.

All these deductions are described in article 218 of the Tax Code of the Russian Federation. They fall into two categories:

– deduction for the taxpayer – set for 2 categories of citizens.

• The first category includes participants in the liquidation of the accident at the Chernobyl nuclear power plant, victims of this disaster and other persons specified in paragraph 1 of Article 218 of the Tax Code of the Russian Federation. The amount of the deduction is 3'000.00 🪙 for each month.
• The second category includes Heroes of the USSR and states, participants in hostilities and other persons specified in paragraph 2 of Article 218 of the Tax Code of the Russian Federation. The amount of the deduction is 500.00 🪙 for each month.

– deduction for a child (children) – is due to citizens who have a child or children, as well as guardians, trustees, foster parents. Unlike other standard deductions, this tax deduction has a number of features.

• Granted for each month until the income limit of 350'000.00 🪙 is reached. For example, with a salary of 50'000.00 🪙 per month, after 7 months the taxpayer will lose the right to deduct for the child.
• Available for every child under the age of 18. And for each full-time student, graduate student, resident, intern, student and cadet, the right is extended to 24 years.
• The deduction for the first and second child is 1'400.0 0 🪙 each. On the third and subsequent – 3'000.00 🪙. For each disabled child, or full-time student, graduate student, resident, intern, student, if he is a disabled person of group I or II, the tax deduction is 12'000.00 🪙 for each. For a guardian, guardian or foster parent – 6'000.00 🪙.

A single parent, adoptive parent, guardian or trustee is entitled to double the tax deduction for children. True, before remarriage.

The provision of the child(ren) deduction is independent of the provision of other standard tax deductions.

Usually, the standard tax deduction for a child is issued by the employer. At the same time, in the case of working at two jobs, the deduction can be issued only from one employer. Also, a deduction can be received when submitting a tax return to the tax office at the end of the year, provided that during the year this deduction was not received from the employer.

Social tax deductions

Tax deductions of this group are regulated by Article 219 of the Tax Code of the Russian Federation. In the code, they are divided into five groups according to the type of expenses:

1. For charity
2. For education
3. For treatment and purchase of medicines
4. For non-state pension provision and life insurance
5. For the funded part of labor pension

The maximum total annual expense for applying social tax deductions is capped at 120'000.00 🪙. The exception is the cost of educating children and expensive treatment. That is, the taxpayer can get back 15'600.00 🪙.

The right to receive a social tax deduction remains with the taxpayer for 3 years from the date of occurrence.

Charity expense deduction

This tax deduction is provided for charitable expenses that were provided in the form of cash assistance. Moreover, the list of organizations that meet the requirements for receiving a deduction by a taxpayer is indicated in the Tax Code. These include charitable organizations, and religious organizations, and non-profit organizations in the field of science, culture, education, and so on.

The amount of the social deduction for charity should not exceed 25% of the taxpayer's annual income.

helping others

The social tax deduction for charitable expenses will not be granted:

• When transferring funds not to the organizations specified in the Tax Code of the Russian Federation, but to the funds established by them.
• If an individual has received any benefit in the provision of charitable assistance. It can be some kind of property, advertising, services, and so on. That is, the help was not disinterested.
• When providing financial assistance to another individual.

Tuition expense deduction

The specified social tax deduction is provided for the costs of their own education in any form, both daytime and evening, and by correspondence or otherwise. Also, the taxpayer has the right to receive a deduction for the payment of full-time education of his or his children under guardianship. Plus, you can get a deduction for the cost of studying a brother or sister full-time.

For more information on how to keep track of expenses and income, read the article (the link will open in a new window).

A deduction for tuition costs can be received not only at a university, but also at other educational institutions, and not only at state ones. The main thing is that this organization has an appropriate license and other document for conducting educational activities.

Such institutions include kindergartens, and schools, and institutions of additional education, and so on.

To calculate the tax deduction, the cost of educating your own or wards children is limited to 50,000.00 🪙 per year. The taxpayer benefit will be 6'500.00 🪙.

Expenses for treatment and purchase of medicines

The social tax deduction can be received by taxpayers who paid for the provision of medical services, including expensive ones, both for themselves and their spouse, parents and children. Also for the purchase of medicines prescribed by a doctor, and for the payment of insurance premiums under a VHI agreement.

One of the conditions for obtaining a tax deduction for treatment costs is the availability of appropriate licenses from medical and insurance organizations. At the same time, medical services, including expensive ones, must be included in the list approved by the Decree of the Government of the Russian Federation.

The amount of the tax deduction for expensive treatment is determined by the amount of actually incurred expenses, without taking into account the limitation of the maximum, total amount of expenses for social tax deductions of 120,000.00 🪙.

Deduction on expenses for non-state pension provision and life insurance

This tax deduction is provided for the costs of paying for contracts of non-state pension provision, voluntary pension insurance and voluntary life insurance. At the same time, a voluntary life insurance contract must be concluded for a period of 5 years or more.

The above agreements can be concluded both in their favor, and in favor of the spouse or spouse, as well as parents. This is also true for the payment of dues on them.

The deduction under contracts of non-state pension provision, voluntary pension insurance and life insurance can be obtained from the employer, that is, before the end of the year. This requires the employer to withhold contributions from the taxpayer's salary and transfer them to the appropriate pension fund or insurance company.

Deduction on expenses for the funded part of labor pension

The taxpayer may make additional contributions to the funded part of his labor pension. In this case, he has the right to a deduction for the costs of such contributions.

If the employer makes additional contributions to the funded part of the pension, the taxpayer will not be able to use this deduction.

life goes on

Social tax deductions can be obtained by filing a tax return with the tax office at the end of the year. And also they can be received before the end of the year through the employer, except for the deduction for charity expenses.

It must be remembered that the total, maximum amount of all expenses for which you can receive a social tax deduction is 120,000.00 🪙 per year, except for the cost of educating children and expensive treatment.

Investment tax deductions

The procedure for obtaining investment tax deductions is determined by Article 219.1 of the Tax Code of the Russian Federation. The right to receive these deductions is received by taxpayers who performed the following operations:

• Purchase and sale of securities on the organized securities market, as a result of which a profit is received;
• Depositing funds to your individual investment account (IIA);
• Getting profit from operations on your individual investment account.

Investment deduction in the amount of income from the sale of securities

You can use this deduction if the securities have been owned for 3 or more years. The period of ownership of a security is calculated according to the FIFO method (from English – first in, first out). That is, from the moment of acquisition of the first time securities.

The maximum amount of the deduction is calculated according to the formula: the number of years of ownership of securities multiplied by an amount equal to 3'000'000.00 🪙. That is, the maximum deduction for 3 years will be 9'000'000.00 🪙, which will allow the taxpayer to return 1'170'000.00 🪙.

This deduction does not apply to income from the sale of securities in an individual investment account.

Investment deduction from the deposited funds on IIS

The right to this deduction arises when concluding an agreement on maintaining an individual investment account. The maximum amount of contribution to IIS, from which a tax deduction is provided, is limited to 400,000.00 rubles in total for the year. The return will be 52'000.00 🪙 per year.

Upon termination of the contract for the maintenance of IIA before the end of the 3-year period from the date of opening, the resulting tax deduction will need to be returned to the budget and additional penalties must be paid.

The tax deduction is not provided if there is more than 1 contract for the maintenance of IIS. The exception is the situation when the IIA agreement is closed and the assets are transferred to another IIA, which belongs to the same taxpayer.

Investment deduction in the amount of income from the sale of assets on IIS

The right to this tax deduction arises at the time of closing the contract for the maintenance of IIS. The main condition is that the taxpayer during the entire term of the agreement has never used the investment deduction from the funds deposited on the IIA.

Another condition is that the contract must be valid for 3 or more years from the date of conclusion.

The tax deduction is determined by the full amount of income received from the sale of securities upon closing the contract for the maintenance of IIS.

property tax deductions

The provision of property tax deductions is regulated by Article 220 of the Tax Code of the Russian Federation.

The implementation of certain real estate transactions allow the taxpayer to exercise the right to property deductions. These operations include:

• Buying a property;
• Sale of property;
• Housing construction;
• Purchase of land for the purpose of housing construction;
• Redemption of property from a taxpayer for state or municipal needs.

The maximum amount of expenses for the purchase of housing or new construction, from which a tax deduction will be calculated, is 2'000'000.00 🪙. Moreover, this is the total amount that applies to both the acquisition of one and several real estate objects. So the taxpayer can get 260'000.00 🪙 back.

When acquiring housing, land for it or construction using targeted loans, the taxpayer has the right to a tax deduction from the taxes paid on such loans. The maximum amount of such expenses for deduction is 3'000'000.00 🪙. The benefit is 390'000.00 🪙 for the entire period of payment of interest on the loan.

In total, the amount of expenses for the purchase of real estate on credit, from which a tax deduction is provided, will be 5'000'000.00 🪙 or 650'000.00 🪙 tax refund.

It must be remembered that the property tax deduction for the purchase of housing is not provided if:

• payment for the construction or purchase of housing was carried out at the expense of the employer or other persons, maternity capital or at the expense of budgetary funds;
• the purchase and sale transaction is concluded with an individual who is interdependent in relation to the taxpayer.

In addition to the above, the taxpayer can also exercise the right to a property tax deduction when selling property. At the same time, the maximum deduction amount is 1'000'000.00 🪙 when selling residential real estate, land plots and shares in them. The refund amount is 130'000.00 🪙. And when selling other property, for example, a garage, a car and other items, the deduction will be 250,000.00 🪙. The refund amount is 32'500.00 🪙.

Professional tax deductions

The procedure for providing professional tax deductions is standardized by Article 221 of the Tax Code of the Russian Federation. The income to which professional tax deductions can be applied is as follows:

• individual entrepreneurs;
• Under civil law contracts;
• Notaries, lawyers and other persons engaged in private practice;
• Copyrights and so on.

According to the rule, the amount of professional tax deductions corresponds to the amount of expenses actually incurred. These expenses must be documented. You can receive these tax deductions both independently and through tax agents.

Sole proprietorships can claim a 20% deduction on total income instead of accounting for expenses incurred.

Secrets of getting tax deductions

After it became clear what tax deduction and for what you can get, it remains to decide on the list of necessary documents for this.

make a list of documents

It must be remembered that part of the deductions can be received before the end of the year through a tax agent, in most cases, this is the employer of the taxpayer.

Each of the existing tax deductions has its own list of documents, which depends on the specific situation of the taxpayer. However, there are common documents for all of the deductions. These include:

• Passport of a citizen of the Russian Federation.
• Tax return form 3-NDFL.
• Certificate of income of individuals in the form of 2-NDFL, from the place of work.
• Certificate of income part-time (if necessary).
• Application for refund of overpaid tax.

An application for the refund of the amount of overpaid tax can be submitted, both together with all documents, and after completion of a desk audit. The application must contain the details of the taxpayer's personal account for the refund of overpaid tax.

The lists of documents for tax deductions are open and their composition may vary depending on the situation.

Standard tax deductions

List of basic documents for deduction for a child (children):

• certificate of birth or adoption (adoption) of a child;
• certificate of disability of the child (if the child is disabled);
• a certificate from an educational institution stating that the child is a full-time student (if the child is a student);
• confirmation of marriage registration between parents (passport or marriage registration certificate).

List of additional documents for the deduction for a child for a single parent:

• death certificate of the other parent;
• an extract from the court decision on recognizing the other parent as missing;
• certificate of the birth of a child, in the form No. 25;
• a document certifying that the parent is not married (passport).

List of additional documents for a deduction for a child for guardians:

• decision of the body of guardianship and guardianship or an extract from the decision of the said body on the establishment of guardianship (guardianship) over the child;
• an agreement on the implementation of guardianship or guardianship;
• an agreement on the implementation of guardianship over a minor citizen;
• foster family contract.

Social tax deductions

Social tax deduction for charity expenses

List of documents:

• payment documents (receipts for incoming cash orders, payment orders, bank statements, etc.);
• contracts or agreements for donations, charitable assistance, etc.

Social tax deduction for tuition expenses

List of main documents:

• an agreement with an educational institution for the provision of educational services with annexes and additional agreements to it (if concluded);
• license (if the contract does not contain its details) or other relevant document;
• payment documents confirming the actual expenses of the taxpayer for training (checks of cash registers, cash receipts, payment orders, etc.).

List of additional documents for the education of your own or ward child, brother or sister:

• a certificate confirming full-time education in the relevant year (if this item is not included in the contract with the educational institution for the provision of educational services);
• birth certificate of the child;
• documents confirming the fact of guardianship or guardianship – an agreement on the implementation of guardianship or guardianship, or an agreement on the implementation of guardianship of a minor citizen, or an agreement on a foster family (if the taxpayer spent money on the education of his ward);
• documents confirming kinship with a brother or sister.

Social tax deduction for medical expenses

List of documents for treatment:

• an agreement with a medical institution for the provision of medical services;
• certificate of payment for medical services with code 1, issued by the medical institution that provided the service;
• license of a medical organization or individual entrepreneur, if the contract or certificate does not contain its details

List of documents for paying for expensive treatment:

• an agreement with a medical institution for the provision of medical services;
• certificate of payment for medical services with code 2, issued by the medical institution that provided the service;
• license of a medical organization or individual entrepreneur, if the contract or certificate does not contain its details

List of documents for the purchase of medicines:

• prescription form in the prescribed form;
• payment documents confirming the actual expenses of the taxpayer for the purchase of medicines (checks of cash registers, cash receipts, payment orders, etc.)

List of documents for insurance premiums under the VHI agreement:

• contract of voluntary medical insurance or medical insurance policy of voluntary insurance;
• a copy of the license of the insurance company, if the contract does not contain information about its details;
• payment documents confirming the actual expenses of the taxpayer for the payment of insurance premiums (checks of cash registers, cash receipts, payment orders, etc.).

signing documents

To receive a deduction for the cost of treatment or contributions, or the purchase of medicines for members of your family, you must submit documents confirming kinship, guardianship or guardianship, marriage.

Social tax deduction for expenses on non-state pension provision and life insurance

List of documents:

• an agreement with a non-state fund or an insurance policy with an insurance company.
• marriage certificate, if the taxpayer has paid contributions for the spouse
• birth certificate (documents of adoption) of the taxpayer, if the taxpayer paid contributions for his parents (adoptive parents)
• birth certificate of the child (documents establishing guardianship (guardianship) or adoption), as well as a certificate of disability for the child, if the taxpayer has paid contributions for his or her disabled child (including an adopted child or one under guardianship)
• payment documents confirming the actual expenses of the taxpayer for the payment of contributions (checks of cash registers, cash receipts, payment orders, etc.).

Social tax deduction for expenses on the funded part of the pension

List of documents:

• a certificate from the employer on the amounts of additional insurance premiums that were withheld and transferred by him on behalf of the taxpayer;
• payment documents confirming the actual expenses of the taxpayer for the payment of contributions (checks of cash registers, cash receipts, payment orders, etc.).

Investment tax deductions

List of documents:

• an agreement on maintaining an individual investment account, or an agreement on brokerage services / an agreement on trust management in the form of a single document signed by the parties, or an application (notice, notice) on joining the regulation (agreement) of brokerage services or trust management;
• payment documents confirming the fact of depositing funds to a brokerage account (payment order, if funds were credited from a bank account, or a cash receipt order, if funds were deposited in cash, or an instruction for crediting funds together with a broker (manager) report on the transaction transactions, if funds were transferred from another account opened with a broker (manager);
• broker's reports confirming the period of ownership of the sold securities.

List of documents for obtaining a tax deduction through a tax agent (broker):

• a certificate from the tax authority that the taxpayer has not previously enjoyed the right to receive an investment tax deduction in the amount of funds deposited in IIS,
• a certificate from the tax authority that during the term of the agreement on maintaining an individual investment account, the taxpayer did not have other agreements on maintaining an individual investment account.

property tax deductions

List of basic documents when buying a property:

• certificate of state registration of the right to a residential building – during the construction or acquisition of a residential building;
• an agreement on the acquisition of an apartment or a room, an act on the transfer of an apartment or a room (a share/shares in it) to a taxpayer, or a certificate of state registration of the right to an apartment or a room (a share/shares in it) – when acquiring an apartment or a room;
• certificate of state registration of ownership of a land plot or a share / shares in it and a certificate of state registration of ownership of a residential building or a share / shares in it – when acquiring a land plot for construction or for finished housing (shares / shares in it);
• a target loan agreement or a loan agreement, a mortgage agreement concluded with credit or other organizations, a loan (loan) repayment schedule and payment of interest for the use of borrowed funds – when paying off interest on targeted loans (credits).
• payment documents confirming the taxpayer's expenses when acquiring property (receipts for credit orders, bank statements on the transfer of funds from the buyer's account to the seller's account, sales and cash receipts, acts on the purchase of materials from individuals indicating the seller's address and passport data and other documents);
• payment documents confirming the payment of interest under a target loan agreement or a loan agreement, a mortgage agreement (in the absence or “burning out” of information in cash receipts, such documents can be extracts from the taxpayer's personal accounts, certificates of the organization that issued the loan on interest paid for using the loan).

List of additional documents when acquiring property in common joint ownership:

• a copy of the marriage certificate;
• a written statement on the agreement of the parties to the transaction on the distribution of the size of the property tax deduction between the spouses.

List of documents for the sale of property:

• property purchase and sale agreement, barter agreements, etc.
• payment documents confirming the fact of the acquisition of property (cash receipt orders, sales and cash receipts, bank statements, payment orders, seller's receipts for receiving funds, and so on).

The procedure for obtaining a tax deduction

As discussed above, you can get a tax deduction for buying an apartment, for paying interest on a mortgage, for medical treatment, for buying medicines, for studying, for paying a life insurance policy, and so on. To do this, you need to file a tax return 3-NDFL in a timely manner.

According to the Tax Code, the taxpayer can receive the deduction due to him through the tax office or through his employer. Depending on the chosen method, the procedure is different.

difficulty of choice

Option 1: issuing a deduction through the tax office

General procedure for filing a tax return with the tax office.

1. Get a certificate in the form 2-NDFL for the corresponding year in the accounting department at the place of work.
2. Prepare a set of documents confirming the right to receive the appropriate deduction, including their copies. Lists of documents were discussed earlier in this article.
3. To issue a tax return in the form of 3-NDFL at the end of the year.
4. Submit a completed tax return and a set of documents to the tax office at the place of residence. Together with the application for the return of personal income tax.

You can file your tax return in person, by mail, through a trustee, or through the website of the Federal Tax Service.

Do not forget, when submitting a declaration through the tax office, prepare 2 (two) copies of the tax declaration. The first copy is handed over to the inspection, and on the second (your) copy, the tax inspector accepting the documents must put a mark on the acceptance of the declaration. Be sure to follow this moment.

When submitting documents through the tax office, you must have the original documents with you to present them to the tax inspector, if necessary.

After receiving the documents, a desk audit begins, which lasts 3 months. Upon completion of the check, the overpaid tax is refunded to the bank account indicated in the application. The return period is 30 days.

Option 2: filing a tax deduction through the employer

Depending on the type of tax deduction, there are two algorithms of actions for obtaining a tax deduction from the employer.

Steps to claim the standard child tax credit(s):

1. Prepare copies of documents confirming the right to receive a deduction for a child:
   • If the taxpayer is a single parent (single foster parent), it is necessary to supplement the package of documents with a copy of the document certifying his status.
   • If the taxpayer is a guardian or custodian, it is necessary to supplement the package of documents with a copy of the document on guardianship or guardianship of the child.
2. Write an application to the employer for a tax deduction for a child.
3. Contact your employer with an application for a standard child tax deduction and copies of documents confirming the right to such a deduction.

The procedure for obtaining a social tax deduction:

1. Prepare a package of documents confirming the right to receive a social deduction for expenses incurred.
2. Submit to the tax office at the place of residence an application for notification of the right to a social deduction and a package of supporting documents, with copies.
3. Receive a notification from the tax office about the right to a social deduction, after 30 days.
4. Submit a notice of the right to a social deduction to the employer.

The notification of the right to a social deduction is the basis for the employer not to withhold personal income tax from the income that is paid to the taxpayer.

Repetition is the mother of learning

In conclusion of the article, let's remember once again what a tax deduction is and how to get it. Every taxpayer in our country is entitled to a refund of overpaid tax on a range of expenses. The tax code divides payments into five categories:

1. Standard tax deductions
2. Social tax deductions
3. Investment tax deductions
4. property tax deductions
5. Professional tax deductions

Each category has its own list of documents confirming the taxpayer's right to a tax deduction. You can receive deductions either through the employer during the year, or through the tax office at the end of the year.

Now you know what a tax deduction is in simple terms. Use the information you receive to benefit yourself and your family.

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