Refund of tax deductions also for low-income earners: here’s when you’re entitled to it

Understanding Tax Refunds for Low-Income Individuals

Every year, one of the most anticipated moments for taxpayers is related to tax refunds, whether filing the 730 form or using the Redditi model.
It is commonly believed that low-income individuals are not entitled to tax refunds because they do not pay taxes and thus cannot benefit from tax deductions.
But is this really the case?

Indeed, individuals with no tax liability are not eligible to claim any deductions.
Since they do not pay taxes, they cannot receive a refund for taxes that were not owed in the first place.
This means that no deductions can be subtracted from taxes that are not paid, leading to no possibility of a tax refund for those falling within the no tax area where taxes are zeroed out due to deductions from work or pension income.

No Deductions for Low-Income Individuals in the 730 Form

For individuals earning up to 8,500 euros, no income taxes are due as they are offset by deductions from work or pension income.
Consequently, individuals in this income bracket cannot claim any deductions for the reasons mentioned earlier: there is no tax to discount from.

Moreover, individuals in this category are not required to file a tax return if their income is solely subject to withholding tax by a single payer, and there is no benefit in filing a return to claim deductions they are not entitled to.
However, this only applies to income derived from pensions or employment.
The situation changes for those receiving compensation subject to withholding tax.

For individuals who worked under withholding tax in 2023, even if they did not exceed the 8,500 euro threshold, filing a tax return using the 730 form can be highly advantageous.

Claiming Refunds for Withholding Tax Recipients

When receiving income under withholding tax, the payer withholds 20% to cover the withholding tax.
In this scenario, the tax withholding agent is not required to verify the individual’s tax capacity and must withhold tax even if it is not due.

However, when filing the 730 form, any excess withholding tax can be fully recovered.
Consider a scenario where an individual earned a total income of 5,000 euros from various payers but only received 4,000 euros after a 20% withholding tax was applied.
If this was their only income, placing them in the no tax area, they were not liable to pay taxes.
By submitting the tax return, they can reclaim the amount withheld as withholding tax, resulting in a refund of 1,000 euros.

Therefore, it is always beneficial to file a tax return when income is subject to withholding tax, even if the earnings fall within the no tax area.