The income averaging scheme, once a valuable tool for individuals with highly fluctuating incomes, has been abolished as of January 1, 2023. This scheme allowed taxpayers to reduce their tax burden by averaging their income over three consecutive years. But why has it been discontinued, and what does this mean for you? Let’s break it down.

What is Income Averaging?

Income averaging was a tax arrangement that allowed individuals to claim a refund if their income varied significantly over three consecutive years. By calculating the average income for these years and recalculating the tax owed, you could potentially receive a refund. This was particularly beneficial for people experiencing income fluctuations due to job changes, entrepreneurship, or sabbaticals.

Example: Suppose your income over three years was:

  • Year 1: €10,000
  • Year 2: €70,000
  • Year 3: €10,000

By averaging, your income would be redistributed to €30.000 per year. This could lead to a lower tax burden and a potential refund.

Why is the scheme being phased out?

According to the Dutch government, the income averaging scheme was discontinued to simplify the tax system. While it provided benefits, its usage was relatively limited. Many taxpayers were unaware of the option, and it created an administrative burden for both individuals and the Tax Administration.

Additionally, with the new tax system introduced in 2023 (including simplified tax brackets), income fluctuations are expected to have less significant tax implications.

Until when can you use Income Averaging?

Although the scheme was officially abolished on January 1, 2023, a transitional period applies. You can still apply for an averaging refund if at least one of the three years in your averaging period falls before 2023. The final eligible averaging period is 2022-2024, and you have until 2027 to submit a request.

Note: Income averaging is only applicable if the tax difference exceeds €545. If not, you are not eligible for a refund.

What are the alternatives?

With the disappearance of income averaging, taxpayers must rely more on planning and a clear understanding of their tax situation. Here are some tips:

  • Distribute income: Where possible, spread your income over multiple years, such as through agreements with your employer or clients.
  • Seek tax advice: Consult a tax advisor to explore how to optimize your tax burden, especially with significant income fluctuations.
  • Stay updated on new schemes: Keep an eye on tax regulations, as new measures might be introduced to address income inequality or high tax burdens.

Conclusion

While the income averaging scheme provided relief for individuals with fluctuating incomes, its abolition marks a move toward a simpler tax system. Ensure you submit a request in time if you are still eligible. Do you have questions about your tax situation? Contact a tax advisor or your accountant to explore how to make the most of current tax regulations.

Need help with your taxes? Reach out to Luca Book for personalized advice!