The top 5 reasons you owe Danish Tax and How to Avoid them
Are you wondering why you owe so much in taxes this year? Want to make sure you never owe a big tax bill when you file your income taxes?
Danish tax rules and processes are complicated and often lead to wrong and/or underpaid tax. To avoid this, the majority of Danes deliberately set the tax deductions too low in the advance calculation to be sure to get money back from SKAT and thus use it as a kind of savings. But this results in an unnecessary over-withheld tax from your pay throughout the year "just to be sure". Money that is be tied up all year when you could be putting it to better use.
We can help you getting your money up-front without underpaying taxes and never worrying about a big tax bill at the end of the year. Below we listed the most common mistakes that lead to a tax bill.
The top 5 reasons you owe SKAT
1. Your preliminary tax return (Forskudsopgørelse) and annual tax return (Årsopgørelse) are not correct
The Preliminary tax return (Forskudsopgørelse) is used to determine how much you expect to have of income/deductions during the year and the amount you need to pay in tax based on this expected income.
The Danish tax authority (SKAT) will automatically issue both your preliminary tax return and annual tax return. However this is generated by a "computer" based on information available in the online tax system (E-tax). Further the preliminary tax return is normally based on previous years income which is very often not the same every year. Therefore, Both your preliminary and annual tax return must always be carefully reviewed.
When the tax year has ended (calendar year) you need to prepare your annual tax return (Årsopgørelse). As opposite to the preliminary tax return where you state expected income, deductions, investments etc., the annual tax return is where you state your final and actual income, deductions, investments etc. To ensure your final tax for the year is correct you must make sure that you include all relevant info. Some allowances are calculated automatically, however travel allowance, commuting deduction or other private deductions will need to be done by yourself manually.
2. Too little withheld from your salary
The Danish tax authority (SKAT) will, based on the information informed on the preliminary tax return, generate a Tax Card stating the tax rate applicable for your income and this is then used by your employer when withholding taxes from your salary.
Note, you employer are only able to see your tax card stating the tax percentage and monthly allowance. Your employer are not able to confirm to you if you are paying the correct amount of taxes.
If the information is not correct in your Preliminary tax return (Forskudsopgørelse) and thus also your generated Tax Card, it may result in a too little withheld tax from your salary throughout the year, which means you will have to pay the remaining taxes at the end of the tax year.
3. You got a new job or a salary raise
We just learned that your Tax Card is automatically generated based on the information on your preliminary tax return. We also learned that information in the preliminary tax return is automatically generated by a "computer" based on information available in the online tax system (E-tax) (from previous years).
Therefore, if you get a new job or a salary raise, the income stated on your preliminary tax return is most likely wrong and should be updated. Often we see that people get a higher salary in the new job which means the employment income should be raised on the preliminary tax return. Further, when changing employer, you will be taxed upfront on earned holiday entitlement. Normally the holiday entitlement are taxed in the year you used it, but when you change employer it becomes taxable pre-using it which means you will have to include this amount as taxable on the preliminary tax return.
If you don't update your income, you will most likely end up owing SKAT.
4. You moved, resulting in longer/shorter commuting distance
Deduction for commuting between your home and workplace is among some of the deductions which are not calculated automatically. Therefore, if you have longer or shorter distance to your workplace than usual, and you haven't updated your deductions on your preliminary tax return or your annual tax return, you might end up paying more preliminary tax than you're supposed to. Further, many people are not aware that you can get the commuting deduction not only when you go by your own car, but also by train, share car pool, bike etc. and even walking. The commuting deduction is not depending on you having an expense. The commuting deduction applies for trips longer than 24 kilometers daily e.g. distance between your home and workplace are 15 kilometers resulting in a daily commute of 30 kilometers which gives you a commuting deduction on the excess above 24 kilometers.
Commuting deductions will always need to be done by yourself manually.
5. You bought real property
Buying a house will as main rule involve you taking up a loan from a bank. Along with a loan comes interest expenses and different registrations fees, bank guarantee etc. All have one thing in common and that is they are tax deductible. If you have bought a house you will also have to pay property tax and real property tax whereas the last mention is paid via your taxes deducted from your employment income.
Cost related to bank guarantee when taking a loan in connection with buying a house is often not reported to SKAT by banks and therefore you have to manually include the deduction. Further, interest expenses are not included in your preliminary tax payments and therefore you have to manually include these the first year. Ongoing years you will still have to check that the amount of interest expenses are correct. SKAT will use the amounts from last year and therefore you will also manually have to adjust the amount.
We have listed the most common mistakes which results in a tax bill, but there can of course be other scenarios and root causes for wrong tax payments. In summary, to avoid paying a wrong amount in preliminary tax, you must make sure that you include all expected income, deductions, investments etc. and remember to update the preliminary tax return whenever something changes (e.g. new job, salary raise, buying real property, changes in interest expenses, new address with longer/shorter commuting distance etc.).
Still confused? Let us help you
It's no wonder if you find it confusing to find your way around the Danish tax system. Due to non-transparent tax law and online self-service solutions, many people struggle understanding tax rules, how to navigate in the tax system and obligations as a tax payer. Unfortunately, the result is high risk of over/underpayment of taxes and
non-compliance which is not fair or acceptable for anyone.
YourTax is here to help you manage your Danish tax and support with preparing both your preliminary (Forskudsopgørelse) and annual tax return (Årsopgørelse). We not only check for relevant allowances and deductions, we also ensure that you pay the correct amount of tax during the year so you do not end up with a big payment to SKAT end of the year. Our services are for everyone, so reach out now and let us help you today.
We look forward to hear from you.