Taxable income includes all kind of income from past and present employment, business and profession, and capital. All income received by the taxpayer in money or moneys worth is subject to tax, unless it is exempt. The collection of individual income taxes (state and municipal) on employment income takes place at source each month during the income year.
Taxable income is divided into three main categories.
Category A. Wages and salaries, including presumptive employment income of the self-employed, employment-related benefits, old-age pensions, social security payments, grants, payments to copyright holders, royalties etc.
Category B. Income from a business and income from an independent economic activity.
Category C. Capital income such as dividends, interest and capital gains.
The categories are important because only deductions expressly provided for by law may be deducted from the income of Categories A and C, and because operating losses may only be deducted from income of Category B. In computing the income tax of individuals not engaged in a business, the net results of Categories A and C are aggregated. Individuals are taxed separately at a flat rate of 20% for dividends and capital gain but 10% for interest of Category C in the year 2017.
A self-employed individual must declare as employment income an amount comparable to the remuneration he would receive if similarly employed by an unrelated person (presumptive employment income). The same applies if an individual works for a partnership in which he participates directly or indirectly as an owner. Furthermore, the spouse and children under 16 years of age who work for the taxpayer's business or partnership must declare as unrelated person. An amount equal to the individual's own presumptive income, or to that of his spouse or children, is deductible as operating expenses from the income of the private or partnership business, as the case may be. If the presumptive income declared by an individual is lower than what he would earn if similarly employed by an operating loss higher than the total sum of ordinary depreciation deducted from business income. The Ministry of Finance publish in January every year rules about reference for earnings of self-employed individuals and independent activities. This publication can be viewed here in Icelandic. Please contact the next Tax office for assistance.
The business income of individuals is subject to the same rules regarding the calculation of taxable income as apply to companies, and an individual's business income is liable for social security contributions. Social security contributions are levied only on employers and on self-employed individuals on their presumptive employment income.
In principle, all benefits in kind are included in taxable income. In some cases, for example with regard to company cars, special rules apply.
Gains from the sale of privately owned immovable property are included in taxable savings and investment income, and taxed at the rate of 20% in the year 2017 (by assessment). Losses on the sale of such property are generally not deductible; however, they may be deducted from gains made on the sale of similar property in the same year.
Gains from the sale of a private residence are tax free if the residence has been owned by the taxpayer for at least 2 years and its size is within certain limits. If such residence has been owned by the taxpayer for less than 2 years, the gains may be rolled over through a reduction in the acquisition cost of another private residence. Taxation of such gains may be deferred for 2 years. The same applies to the gains on which taxation is deferred.
Gains from the sale of private (non-business) movable property are generally not included in taxable income.