IRS overhaul: who gains and who loses?

Effective January 1, 2022, a taxation system based as follows is provided for by Article 1 of Law 234/2021:

• Income up to 15,000 euros: IRPEF equal to the 23%;
• Income between 15,001 and 28,000 euros: IRPEF equal to the 25%;
• Income between 28,001 and 50,000 euros: IRPEF equal to 35%;
• Income over 50 thousand euros: IRPEF equal to the 43%.

Two tables are given below to facilitate comparison with the previous system:

These changes made to IRPEF brackets and rates, can be represented as follows:  

From the last table, it can be concluded that: for middle/high incomes, there will be a considerable tax benefit starting this year, and therefore, this is a reform that will benefit the part of the population with higher incomes the most.

The Budget Law 2022 also makes changes to Article 13 of Presidential Decree 917/1986 (Consolidated Income Tax Act, so-called "TUIR"), reshaping the rules on employee deductions.

Specifically, starting this year, a deduction from the gross tax is due, Relative to the period of work in the year, amounting to:

1. 880 euro, if the total income Does not exceed 15,000 euros. The amount of deduction actually due cannot be less than 690 euros. For fixed-term employment relationships, the amount of the deduction actually due may not be less than 1,380 euros;
2. 910 euro, increased by the product of 1,190 euros and the amount corresponding to the ratio of 28,000 euros, less total income, to 13,000 euros, if the amount of total income is Higher than 15,000 euros but not 28,000 euros
3. 910 euro, if the total income is Higher than 28,000 euros but not 50,000 euros; the deduction is for the part corresponding to the ratio of the amount of 50,000 euros, less the total income, to the amount of 22,000 euros.

An additional deduction is also introduced, where the Budget Law stipulates that the allowable deduction, as determined above, should be increased by an amount equal to 65 euro, if the total income is more than 25,000 euros but not 35,000 euros.

In practice, the above quantification of employee deductions results in the following formulas:

The translation of the new changes to the tax treatment framework once again highlights the benefit toward income brackets between 20,000 and 45,000 euros, as per the table below.

The new rates and the redefinition of deductions under Article 13 of the TUIR are accompanied by the redefinition of the supplementary treatment system, so-called former Renzi bonus, introduced and regulated by Decree Law 3/2020, converted, with amendments, by Law 21/2020.

Supplementary Treatment

In detail, the following are the amendments to Article 1 (supplementary treatment): "Pending a review of income support instruments, if the gross tax determined on the income referred to in Articles 49, excluding those indicated in paragraph 2(a), and 50, paragraph 1(a), (b), (c), (c-bis), (d), (h-bis) and (l), of the Consolidated Income Tax Law, referred to in Presidential Decree No. 917 of December 22, 1986, is greater than the amount of the deduction due under Article 13, paragraph 1, of the said Consolidated Law, a sum of 917, is higher than the amount of the deduction due under Article 13, paragraph 1, of the aforementioned Consolidated Text, a sum is recognized as a supplementary treatment, which does not contribute to the formation of income, in the amount of 600 euros for the year 2020 and 1,200 euros from the year 2021, if the total income is not greater than 15,000 euros" [...] "the supplementary treatment is recognized even if the total income is more than 15,000 euros but not 28,000 euros provided that the sum of the deductions referred to in Articles 12 (deductions for family burdens) and 13,paragraph 1 (additional deductions for employment), the deductions referred to in Art. 15 paragraph 1, letters a) and b) and paragraph 1-ter (mortgage interest expense), limited to charges incurred in dependence of loans or mortgages contracted until December 31, 2021, and of the installments related to the deductions referred to in Articles 15, paragraph 1, letter c) (health care expenses) and 16-bis) (deductions of expenses for interventions for the recovery of the building heritage and energy requalification of buildings) as well as those related to deductions provided for by other regulatory provisions, for expenses incurred until December 31, 2021, is of an amount exceeding the gross tax. In the event that the conditions provided for in the second period are met, the supplementary treatment is recognized for an amount, however, not exceeding 1,200 euros, determined in an amount equal to the difference between the sum of the deductions listed therein and the gross tax."

Therefore, the payment of supplementary treatment for incomes up to 15,000 euros remains unaffected and peaceful.

Far from easy, on the other hand, will be the determination of the right to receive supplementary treatment for those individuals with incomes placed in the range between 15,000 euros and 28,000 euros, given the strange wording of the second part of Article 1, Paragraph 1, which provides for the right to supplementary treatment only upon the fulfillment of the following provisions:

31. Entitlement to deductions under Art. 13 (employee), Art. 12 (dependent family members), deductions for health care expenses (Art. 15, para. 1, lett c) jointly with any expenses for specific charges (interest on mortgages and expenses for building renovation) only if the same were incurred by the end of the year (specific deadline to 31.12.2021);
32. the amount of such deductions must be greater than the worker's gross tax liability. Therefore, the worker must be in the situation of tax incapacity;
33. upon the adversity of conditions a) and b), the worker will benefit from the supplementary treatment equal to the differential between deductions for charges and expenses referred to in paragraph a) above and the value of the gross tax due. All this within the maximum limit of 1,200 euros.

Taking an example, if a worker has an income of 25,000 euros, the gross tax will be 5,950 euros and the deductions under Article 13 (employment) are 2,249.62 euros. In order to fully benefit from the supplementary treatment, the value of tax deductions for expenses will have to be 4,900.38 (5,950.00 - 2,249.62 - 4,900.38 = 1,200.00).

Clearly, this can only be verified in the tax return considering the fact that deductions for charges have an annual variation that cannot be predicted.

Additional Tax Deduction

Effective January 1, 2022, è Repealed the additional tax deduction provided by Art. 2 Decree Law 3/2020. Therefore, there will be no additional benefit for the income bracket between 28,000 and 40,000 euros.

Clearly, an examination of the regulatory updates with regard to Art. 13 deductions in conjunction with the repeal of the deduction under d.l. 3/2020 leads to the value of the tax deduction under d.l. 4/2020 being considered absorbed into the new Art. 13 deductions, as highlighted in the table below.

The introduction of the universal single allowance will result, starting from the March 1, 2022, the absorption of tax deductions for children under the age of twenty-one and a whole range of measures to support the family unit.

Therefore, as of the March 1, 2022, child deductions will accrue only to children over the age of 21 in the following amount: "950 for each child, including recognized natural children, adopted or foster children 21 years of age or older."

The deductions for family dependents under Article 12 of the TUIR, as of March 1, 2022, will apply only for the spouse (Art. 12(1)(a)) and other dependents.

It is clear that an assessment of convenience and appropriateness with respect to the forecasts of the Single Allowance is complicated and linked to the issue of ISEE.