Impact of Personal Deduction Limitants in the Annual Declaration of Individuals

Every year individuals have the obligation of filing their Annual Declaration for the income obtained in a calendar year according to Art. 150 of the L.I.S.R. at the latest on April 30th of the following year, and further, Art. 151 indicates that besides the allowed deductions in each Chapter, the tax base could be lowered by personal deductions, for which it is necessary to define the tax elements:

1. In order to carry out the analysis, we will consider those Individuals receiving income as a result of providing a subordinate personal service, and associated benefits derived from a labor relationship.
2. The ISR tax the income received by Individuals, derived from a labor relationship.
3. The base for determining the tax according to Art. 152 of the L.I.S.R., is obtained by subtracting the personal deductions, referred to by Art. 151, from the total accumulated income, to which the corresponding fees are applied.

According to Art. 98, Fract. III, of the L.I.S.R., taxpayers who receive income from salaries will submit their annual declaration in the following cases:

1. When besides the salary, they get income from other sources.
2. When voluntarily they communicate in written to the retainer that they will file their annual declaration.
3. When they stop working before December 31th or when they have worked for two or more employers.
4. When they get income from a foreigner source.
5. When their annual income from salaries exceed $ 400,000.00 Mexican pesos.

Now then, from this point of view, we know that the so called Personal Deductions, allow to lower the tax base in order to lower the tax liability and to determine a higher favoring refund, which are listed below:

• Medical, dental, psychological and nutritional expenses, and hospital expenses (provided that they have been paid through any electronic means).
• Funeral expenses.
• Donations
• Actual interests paid on real estate mortgage.
• Voluntary contributions for retirement.
• Personal retirement plan.
• Insurance payments for Medical expenses.
• School Transportation, when it is obligatory.
• Monthly tuition based on the fiscal stimuli, paid for education services.

When we believed that we had fulfilled all requirements and that we had determined a favoring refund, then we find the deduction limits, since these, cannot exceed the amount resulting to be lower from between five UMA´S updated per year (about $ 163,000.00 Mexican pesos) or 15% of the taxpayer’s total income.

A personal deduction having relevance in the annual declaration for 2021 is the actual interests paid on real estate mortgages, since for its determination, the total inflation rate is taken into account, and which rate in the 2021 December month was 7.36%, according to the publication on the INEGI website.

Actual interests = (annual inflation rate) – (interest effectively paid)

Example: Determination of the actual deductible interest in a real estate mortgage

As it may be seen, these limits to deductions in a very beaten environment due to the pandemics, and by the economic effects this brought about, result to be very aggressive for the taxpayer who is looking for a rest with the obtainment of a favoring refund, and which limits nonetheless constitute a violation to the equity and proportionality principles in fiscal matters.

Even though it is true that it is an obligation for everyone to contribute to the public expense in a balanced and equitable manner, the limits to deductions oppose to the precepts, when its existence is regulated and allowed for a population sector having no more stimuli nor deductions, in comparison with other taxpayers from other regimes, besides that many of these deductions are used to compensate for social rights (mainly education, housing and health) which the Government should provide in reciprocation to the contribution to the expenses.

*INCOME TAX LAW

*Source:https://www.inegi.org.mx/contenidos/saladeprensa/boletines/2022/inpc_2q/inpc_2q2022_01.pdf