How do tax deductions really work? Let's break it down!

Think deducting 100€ means 100€ less in taxes? Not quite! Learn how tax deductions really work in Luxembourg and discover your actual savings with our simple guide.

When tax season rolls around, everyone talks about tax deductions. Many people assume that deducting 100€ say, for an insurance premium, means they'll pay 100€ less in taxes. If only it were that simple! Here's what's actually going on.

So, what exactly is a tax deduction?

A tax deduction lowers your taxable income, not your tax bill directly.

Think of it this way: it reduces the amount of income that gets taxed, rather than slicing money straight off your tax bill.

Here's an example:

Let's say you earn 50.000€ in taxable income, and you deduct 3.200€ for your pension plan. Your taxable income now becomes 46.800€. That's the number the tax office uses to calculate what you owe.

Okay, but how much do I actually save?

Here's the thing: deducting 3.200€ doesn't mean you save 3.200€ in taxes. It means you're taxed on 3.200€ less income. Your actual savings depend entirely on your tax rate.

Let's make it concrete:

• Your tax rate: 11%
• Your deduction: 100€
  → Your tax savings = 100€ × 11% = 11€

So if you deduct 100€ and your marginal tax rate is 11%, you'll save 11€ in taxes, not 100€.

The bottom line:

• Tax deductions reduce what you're taxed on, not what you pay directly
• How much you actually save depends on your personal tax rate
• Deducting 100€ ≠ saving 100€ in taxes

Got questions about what you can deduct? Check out our other articles, or reach out via chat or email at help@taxx.lu. We're here to help!