Reduction in income tax: who must submit a projection form for personal expenses and how to do it

Workers in a dependency relationship must present their projection of personal expenses this January to obtain a reduction in the income tax that corresponds to 2023 and thus define how much will be deducted from the monthly salary from this month for this tax.

There was a change. “There are two situations, the one who earns more and the one who earns less. The one who earns more can have a lower reduction and the one who earns less has a greater reduction, so that the one who does not earn as much has a lower income tax payment and the one who does earn a little more pays a little more, it is because principle of progressivity”, indicates the Zonal 8 director of the Internal Revenue Service (SRI), Carlos Marín, and explains Who has to present projection of personal expenses.

Individuals with income greater than $11,722 a year have the obligation to file the income tax return. Then the expenses must be deducted to find out if there is indeed a tax to be paid. This is where this discount or reduction for personal expenses intervenes.

Limit of personal expenses will be $5,344.08 to apply to a reduction in income tax

A person in a dependency relationship to calculate the income tax takes all their income taxed with the tax: salary, salaries, bonuses, commissions, 15% participation of the workers in the profits, all the income received by the employee, except what the law establishes is not taxed: thirteenth, fourteenth, reserve fund, that is not part of the tax base, but the rest of the income, everything received by the employee, is part of this income tax base.

The personal contribution of the Ecuadorian Institute of Social Security (IESS) is subtracted from these incomes. If the result is an amount greater than $11,722, which is the basic fraction deducted for this 2023, then you would have to pay income tax. That is when the worker uses his personal expenses to apply for a discount and they are the ones who must present the projection of expenses.

Income that is taxed:

• Salary
• Extra hours
• commissions
• bonds
• Antiquity
• 15% of profits

Income that is not taxed:

• thirteenth salary
• fourteenth salary
• Reserve funds
• Compensation for untimely dismissal in the amount established by the Labor Code, if it establishes, for example, $50,000, those are exempt, but if the employer compensates with $51,000, those thousand dollars go to taxable income.

How does the discount work?

The worker must present the SRI GP form to his employer, detailing what he intends to spend for health, housing, education, clothing, food, art, culture and tourism, all of these are the items that can be used to pay less income tax.

In this form a calculation is made that in the same form that is on the SRI page shows how to do it:

In the box of projected income Gross receipts are listed. No exceptions are made here, the taxable gross income and also the exempt income are added, since this is only to calculate the reduction and not to calculate the amount of tax to be paid. That sum of gross income is the guideline to know how much you can have rebate.

1. If the gross income is greater than 2.13, the basic deductible fraction of $11,722, that is, if you earn more than $24,967.86 per year, you have the right to use a 10% discount. This percentage is applied to the value presented as personal expenses or to the value of seven basic baskets that are $5,344.08, whichever is less, that is, the discount limit is $534.41. For example: if a person earns $50,000 and wants to project $10,000 of personal expenses to have a 10% discount on that $10,000, that is, reduce $1,000 in their tax, they cannot do so because the maximum in this case is $534 .41 discount.
2. Those who earn less than $24,967.86 a year can reduce their tax by 20% in the same way: the lower of their projected personal expenses and seven baskets. For example: for a person who earns $20,000 and wants to project $4,000 in personal expenses, his discount is 20%, which is equivalent to $800. But if he wants to project $10,000 in expenses, he can no longer deduct 20% of that value, but 20% of the maximum of seven baskets, that is, that its rebate limit is $1,068.82.

In the boxes of the projected expenses The amount estimated to be spent is placed in:

• housing expenses
• Education, arts and culture expenses
• health expenses
• clothing expenses
• Food expenses

There are no limits for each of these expenses anymore. Before there were, but now the limit is in the sale. In these boxes you can enter expenses of any value. “You can put whatever you like, but it is in this last box where you can only put the maximum: $534.41 or $1,068.82.” But keep in mind that if you only put $4,000 in expenses, you will be able to reduce 10% or 20% of that, that is, $400 or $800.

You can also write down a single expense, such as $6,000 in education, and that is enough because it completes the limit established for this 2023, which is $5,344.08 (seven basic baskets). Or also itemize $1,000 or $2,000 in food, clothing or other expenses.

Marín recalls that in practice people who earn up to $1,750 in salary will not pay income tax if they use the reduction with the presentation of their personal expenses.

What happens if you don’t give the expense projection form to your employer?

Current regulations indicate that the form must be submitted initially in January, but if it is not done in this month, it can be submitted in July or August so that the employer can recalculate the tax.

Marín explains that this occurs because the worker can change the projection of personal expenses, if he planned to spend $3,000 on health, for example, and then he got sick and thus the situation changed. The employer must receive that projection. The form can also be filed in any month if the worker receives a pay raise.

This is based on Resolution NAC-DGERCGC22-00000018, which amended previous resolutions and which is in force after its publication in the Third Supplement of the Official Gazette No. 60 of May 11, 2022, and which indicates that “when in the course of of the fiscal year, should there be changes in remuneration, exempt income or in the projection of the worker’s personal expenses, the employer will make the corresponding re-settlement for purposes of future monthly withholdings. In the event that the employee considers that his projection of personal expenses will be different from the one originally presented, he may deliver to his employer, in the months of July or August, a new document for the re-liquidation of the corresponding future withholdings.

“This new document may also be presented in any month of the fiscal year, provided that the projection changes are due to an increase in the worker’s wages or salary, or exempt income with the employer that makes the withholding or with other employers, in accordance with the provisions of article 4 of this resolution; or, when the previously projected personal expenses are lower than those that are actually estimated to be made”, said resolution refers to.

What happens if you don’t file the form in any month and they hold you for the whole year?

You can present the declaration and there reflect the personal expenses to request a refund. It is automatic, the employer reports his income, contributions to the IESS and personal expenses if he presented them, but if he did not do so in February -when the personal expenses annexes must be presented- he can include them and in that annex the SRI calculates the reduction and the balance comes out in favor. (YO)