Posted on 10 January 2025

Don't compare your taxes with your friends, here's why!

Discover why comparing your taxes with your friends or colleagues in Luxembourg may mislead you. Each tax situation is unique and depends on various factors such as tax class, income, and deductions.

In Luxembourg, personal taxation is a complex and varied topic. Each taxpayer is subject to specific rules based on individual criteria. This is why the temptation to compare your tax situation with that of your friends or colleagues can lead to wrong conclusions and even frustration.

In this article, we will explore why each tax situation is unique by highlighting some of the key factors that influence taxation in Luxembourg.

The tax class system

In Luxembourg, one of the first elements to consider is the tax class system, which divides taxpayers into three main categories based on their family situation:

Class 1: Single or divorced individuals without dependent children
Class 1a: Single or divorced individuals with dependent children
Class 2: Married individuals or those in a registered partnership

This distinction has a direct impact on the tax rate. For example, a single person without children will not be taxed the same as a married colleague with children. In other words, the tax class you belong to can significantly influence the final amount of your taxes.

Income

It is also important to remember that taxation in Luxembourg is not limited to salary income. Other sources of income, such as rental income, investment income, or pension income, are also taken into account. If your friend or colleague has additional income or foreign investments, their tax situation will naturally differ from yours.

Moreover, some types of income may benefit from exemptions or specific regimes, making direct comparisons even more complicated.

Deductions and tax credits

Luxembourg offers a number of tax deductions and credits that can greatly influence the final amount to be paid.

Some of the most common ones include:

Insurances such as civil liability, health insurance, etc,
Housing savings contributions
Old-age pension contributions
Mortgage interest on your main residence
Childcare costs
Domestic staff costs

Each taxpayer may benefit from different deductions depending on their personal situation, making comparisons difficult. For example, if your colleague deducts the interest on a home loan or childcare expenses, it could significantly reduce their tax compared to yours.

Conclusion

Comparing your tax situation with that of your friends or colleagues may seem like a good way to understand if you're paying "too much" in taxes. However, as we have seen, each tax situation is unique and depends on a multitude of factors: tax class, types of income, specific deductions, etc.

It is therefore better to focus on your own situation and look for legal ways to optimize your taxes rather than compare without understanding the specificities of each case.