How to determine your tax class in Luxembourg

Distinctive features of tax classes

The tax classes in Luxembourg are assigned based on your family situation and income. The tax administration will automatically assign you to a tax class based on the information you provide when you register with the local authorities. They will look at your income, marital status, the number of children you have, and your age (if you are older than 64 years old).

Currently, there are three tax classes in Luxembourg — 1, 1A, and 2:

Your tax class is determined by your personal and marital status on January 1 of each fiscal year. If your situation changes during the tax year, the class may be adjusted accordingly. For example, if you get married, you have a child, or your income changes significantly, you may be re-assigned to a different tax class.

Determining your tax class in Luxembourg

So far tax class system seems quite simple, however, there are many details to consider, such as marriages between residents and non-residents and the effect of tax assimilation.

The following chart shows a more detailed panorama for the class determination considering the differences between residents (marked as R) and non-residents (marked as NR), and the effect of the tax assimilation (marked as TA). Tax assimilation refers to the possibility for non-residents to be treated as tax residents if at least 90% of their total worldwide income is taxed in Luxembourg.

You can see a more detailed version on the Luxembourg tax administration website. Make sure to pay attention to differences if you are taxed as married non-residents for tax years prior to 2017 and for the tax year of 2017: you will be allocated different tax classes, than usual, depending on the situation, i.e. the percentage of the professional income of the household and family circumstances.

If you are unsure about your tax class or if you think you may be eligible for a different tax class, you should consult with a tax professional or contact the Luxembourg tax administration to get more information or request a class change. Contacts for Luxembourg tax administration for individuals are divided by communes: find your local tax office on the official website.

For this reason, there has recently been a petition to review the tax classes that have piled up 5,500 signatures, which is more than the 4,500 signatures needed for a debate in the Chamber of Deputies.

Taxation of different classes

The amount of taxes to pay is based on a progressive income tax system, which means that the more you earn, the higher the percentage you will pay in taxes. However, your taxes are not calculated directly on your income, this is where the classes come into play. They serve to determine the value on which your taxes will be calculated according to your class and your income.

To use that table, you must consider that the tax is calculated progressively. This means that if for example, you have an annual income of 16,000 euros, although the percentage that corresponds according to the table is 9%, this percentage is not applied to the totality of the 16,000 euros but is applied only to the range of income that falls in this level.

It is still important to understand how the calculation process works. In the following sections, we will show examples of how the calculation is performed for each of the classes but it's worth noting two points about the calculations in our examples:

Tax class in Luxembourg only affects the calculation of income tax. Other taxes, such as value-added tax (VAT) and property tax do not depend on the tax class of the individual.

Class 1 tax amount

With this class, the tax rate applies to your entire income.

Example

If your annual income is 20,000 euros and you have class 1, your taxes will be calculated based on your entire income as follows:

• 0% on the first 12,438 euros
• 8.56% on the next 2,069 euros (12,439 – 14,508)
• 9.63% on the next 2,069 euros (14,509 – 16,578)
• 10.70% on the next 2,069 euros (16,579 – 18,648)
• 11.77% on the next 1,351 euros (18,649– 20,000)

To calculate the tax due on each amount, we multiply it by the corresponding tax rate:

• 2,069 euros x 8.56% = 177.10 euros
• 2,069 euros x 9.63% = 199.24 euros
• 2,069 euros x 10.70% = 221.38 euros
• 1,351 euros x 11.77% = 159.01 euros

So, the total due will be 177.10 + 199.24 + 221.38 + 159.01 = 756.73 euros

Class 1A tax amount

This class applies to widowed individuals not included in Class 2 (so, less than 3 years), people aged 65 or older on January 1st of the fiscal year, and single parents with a child living in their household.

Example

Let's say your total taxable income is 80,000 euros. First, you need to subtract half the difference between your income and 49,752 euros from your total taxable income. This essentially reduces your taxable income by an amount that increases as your income gets closer to the bracket.

Then we apply the progressive tax rates to your adjusted taxable income according to the following brackets:

• Income below 41,814 euros: 0% tax rate (assuming no tax on income below this threshold)
• Income between 41,814 and 110,403 euros: 39% tax rate
• Income between 110,403 and 165,600 euros: 40% tax rate
• Income between 165,600 and 220,788 euros: 41% tax rate
• Income exceeding 220,788 euros: 42% tax rate

We calculate the adjusted taxable income as follows: 80,000 - (1/2 * (80,000 - 49,752)) = 65,126 euros. Then apply the tax rate of 39%. 

So, your payable tax for the income of 80,000 euros a year will be a total of 25,301.94 euros. Here is the calculation method: 65,126 * 39% = 25,301.94 euros.

Class 2 tax amount

Taxes for this class are based on half the combined household income, and the amount is multiplied by 2 at the end.

Example

Let's say a married couple has a combined taxable income of 60,000 euros. Since they are in Class 2, their taxable income will be divided by two, which gives us 30,000 euros.

According to the tax rates, the tax for this income level is 2,792 euros.

Then you have to multiply this number by 2 to have the final tax amount — 5,584 euros.

PACS and tax classes in Luxembourg

A domestic partnership or PACS (Civil Solidarity Pact) is a legal recognition of domestic arrangements between two people who have chosen to live together without getting married. This partnership provides legal security in civil matters, tax matters, and social security.

Tax implications of the PACS

When it comes to tax implications for civil partners in Luxembourg, there are two options: joint or separate taxation. Partners can file the joint Form 100 income tax return but only if the PACS has existed for the entire tax year and they have shared a common home or residence for the same period.