Certain deductions, authorised by law, can be deducted from individual’s income. In some cases, work-related expenses may be deducted if substantiated with the appropriate documents.
Employees’ verifiable operating costs of their car used in the service of their employment are deductible from the car allowance provided by their employers. To qualify for the deduction, the employee needs to keep a daily driving log and detail total costs and usage.
The maximum available deduction from the car allowance is ISK 68 to ISK 114 per km. Please note that this amount may vary during the year.
Per diem payments are paid for employees’ occasional travels outside of their contractual place of work. The payments should cover the employee’s expenses incurred by being away from home, including costs for accommodation, food, and other travel related expenses. Employees can report deductions against the per diem payments as stated in the Principal Tax Rates published by the Internal Revenue Directorate. Tax does not have to be withheld from per diem payments as long as the payments are not higher than stipulated in the Principal Tax Rates. If the payments are higher, the difference is liable to WHT.
Parents or supporters of dependent individuals between 16 and 21 years of age who are students or have such low income that they are not able to support themselves can apply to the Internal Revenue Directorate for a reduction of their income tax base. No deduction is available if the dependant is in a field of study eligible for student loans.
The Internal Revenue Directorate can also, in other circumstances, reduce an individual’s income and municipal tax base. Those special circumstances are:
- Sickness, accident, old age, and death, if it reduces the taxpayer’s ability to pay tax.
- Sickness or disability of a child suffering from a chronic disease. A condition for deduction is production of verifiable records of expenses incurred by supporting the child that exceed the normal costs of raising a child.
- Caring for parents or other family members. A condition for deduction is production of verifiable records of expenses to corroborate incurred costs of supporting parents or other family members.
- Damage of property if the taxpayer has suffered considerable damage to one’s property for which one did not receive compensation.
- Non-business related bad debt (e.g. non-refundable securities that have expired).
The tax base reduction application needs to be submitted with the tax return along with documents that are needed to support the application.
In Iceland, personal allowances take the form of personal tax credits (see the Other tax credits and incentives section for more information).