Personal allowances and deductions
Starting from 1 January 2018, the system of personal allowances underwent a significant reform. Mainly, the minimum monthly basic personal allowance was increased to EUR 500, but it is set to decrease for income over certain levels, which results in a specific progressive personal allowance system.
Resident individuals are allowed to make certain deductions from their annual gross income. These include the basic personal allowance of EUR 6,000 (i.e. EUR 500 per month), which, from 2018, only applies to the full extent if annual income is up to EUR 14,400. For annual income over EUR 14,400, the yearly allowance is calculated under the following formula: 6,000 - 6,000 / 10,800 x (sum of income - 14,400). For annual income exceeding EUR 25,200, the basic allowance will be zero.
In addition, deductions are allowed for certain personal allowances, as well as certain deductible documented expenses, which fall into two categories.
The first category includes certain mandatory payments, which can be deducted without any limitations, including unemployment insurance contributions, contributions to compulsory accumulative pension scheme, and certain obligatory contributions to foreign social security schemes.
The second category includes deductions that are allowed for tax policy reasons and which have various limitations on deductibility. The second category includes certain bank and leasing interest paid in relation to acquiring personal residence, certain educational expenses, certain gifts and donations, and certain payments to personal pension schemes.
A resident individual has the right to deduct an additional amount of EUR 2,160 for one's resident spouse, provided that their total combined taxable income does not exceed EUR 50,400.
As of 2016, a 20% deduction is available for income from renting out immovable property. 20% is an estimate of incurred expenses related to the property; these expenses do not have to be documented.
A non-resident individual of another European Union (EU) or European Economic Area (EEA) member state who has derived at least 75% of one’s taxable income from Estonia is also allowed to file a tax return as a resident individual in order to benefit from the deductions available for Estonian residents. Such non-resident individuals may make limited tax deductions also when they derive less than 75% of taxable income from Estonia.
Business deductions can only be made from business income by individuals registered as sole proprietorships. For income tax purposes, sole proprietorships must follow cash basis accounting for their income and expenditure.
Sole proprietors have a right to open a special bank account where they can carry all their business income during the ten days after they have received it. The increase of the amount in that bank account is deducted from the taxable income of the sole proprietor and the decrease of the amount in the account is added to their taxable income.