My finances, my projects, my life
April 14, 2021

Thinking of starting a family? What are the tax implications?

  Compiled by myLIFE team me&myFAMILY July 24, 2017 3101

What are the benefits of having a child? A lot of positive things naturally come to mind, but you probably haven’t thought of the tax benefits! While they aren’t reason enough for having a child, they certainly are a welcome bonus when you realise the extra costs that come with being a parent.

If you are a Luxembourg taxpayer and you have one or more children, you are entitled to a number of tax benefits. Under certain conditions, non-residents considered equivalent to resident Luxembourg taxpayers may also be eligible for these benefits. Here’s an overview of the main benefits offered by the government.

Standard rate allowance for childcare costs

In many families, both parents work and are thus required to pay for childcare, domestic services or assistance and care resulting from dependency. As of 1 January 2017, this standard rate for childcare costs was raised to a maximum of EUR5,400 per tax year. It cannot exceed the costs actually incurred or EUR450 per month.

  • The childcare costs to be taken into account are the sums incurred for persons caring for a child around the clock, or on a day care basis, only if such care has been organised by an approved organisation, and for duly approved crèches, day care centres and nurseries. Sums incurred in another EU Member State are also treated as childcare costs if the persons and organisations providing such care have been approved by the competent authority in their country. The allowance is granted in relation to children eligible for a tax allowance (tax class) and aged under 14 on 1 January of the tax year.
  • Domestic services costs are the amounts incurred for cleaners, housekeepers and other persons in the home if they are employed either directly by the taxpayer or indirectly through a company or association. These persons must have been declared to the social security organisations and must mainly carry out domestic chores in the taxpayer’s home.
  • The assistance and care costs resulting from dependency to be taken into account are the sums incurred in employing persons either directly by the taxpayer or indirectly through a company or association to provide the assistance and care needed as a result of the dependent condition of the taxpayer, the taxpayer’s spouse if they are taxed jointly, or a child that makes them eligible for a tax allowance. The taxpayer must have declared any persons employed to the social security organisations.

(…) if you are married with two children under 18 and are yourself aged under 41 at the beginning of the tax year, you can deduct EUR5,376 for mortgage savings as of 2017.

Higher tax deductions

If your children are part of the tax household, you can take advantage of higher tax deductions on certain investments (e.g. mortgage savings schemes and life insurance policies) and expenses (e.g. contributions and accident insurance premiums). The amount that can be deducted is doubled if you have a spouse or partner (if you are jointly taxed) and then increased by the original deductible amount for each child that receives a tax allowance.

For example, if you are married with two children under 18 and are yourself aged under 41 at the beginning of the tax year, you can deduct up to EUR5,376 (4 x EUR1,344) for mortgage savings as of 2017.

That’s not all!

The tax benefits you are eligible for will vary depending on your civil status, tax situation, income and even the age of your children. This means it can be very difficult to provide a complete overview of the benefits you may be entitled to. Other benefits include:

  • A tax credit for single parents;
  • Tax deductions for maintenance and education-related expenses for children who do not live at home;
  • A tax bonus for dependent children (under certain circumstances) when the child no longer fulfils the conditions for receiving the tax allowance;
  • Etc.

We would advise you to consult a tax expert on these matters. This is the best way forward if you want to be sure you are taking advantage of all the benefits you are entitled to.