IRS scales for 2023: know how much you will pay

You income tax brackets for 2023 they have an update of 5.1%, in order to accompany salary increases. Another novelty is the decrease in the marginal rate of the 2nd tier, which is reflected in the following.

After the breakdown of the levels (which went from 7 to 9 in 2022), the year 2023 brings more changes to these tables that distribute taxpayers according to their declared income.

How many IRS levels are there?

IRS tiers are published in the IRS Code (article 68) and, since 2022, there are 9. Until then there were 7 and until 2017 there were only 5. Which means that, in recent years, a greater adjustment has been sought between the rates to be applied and the income received.

At each level, two tax rates are applied: the standard rate and the average rate (we’ll explain what they are and how they work later on).

What changes in 2023?

The State Budget for 2023 made two important changes to the IRS levels. One was the update, by 5.1%, of income ranges, in order to accommodate the reference value of salary increases negotiated between the Government and social partners.

The other novelty was the drop in the marginal (or average) rate for the 2nd tier to 21% (from 23%). A change that ends up being reflected in the following levels.

According to Portugal’s bank (BdP), these measures, like the change in the minimum existence, “have a positive, but limited, impact on the disposable income of families (on average 0.9%, which is equivalent to around €129 per year)”.

The BdP also considers that these changes “affect the different income deciles in a similar proportion, with the exception of the first two who benefit relatively less due to the low incidence of the tax”.

So let’s see the IRS levels in force in 2023.

How do you know what level you are in?

To find out which of the IRS tax brackets you fall into, you need to calculate your annual taxable income. This income is the sum of everything you earned minus the amount of specific deductions.

At specific deductions they are a value that the State uses to calculate the net income of citizens and vary according to the category of income that the taxpayer receives.

In the case of dependent workers (category A) and pensioners (category H), the specific deductions have a fixed amount of 4,104euros (or the total contributions made to Social Security, if it is greater than 4,104 euros) and must be deducted from the citizen’s total income.

In the case of couples or cohabiting partnerswho choose to joint taxationthe taxable income is calculated based on the average of the pair (the income of each one is added and divided by family quotientthat is, by two).

Example:

In the case of a worker earning a gross monthly salary of €1,000, the annual income of €14,000 (14×1,000 euros) is deducted from the €4,104 of specific deductions.

The taxable income of that worker is then 9,896 euros (14,000 – 4,104 euros).

How to know which rate is applied to you?

For each of the IRS levels there is a standard rate and an average rate. If the taxable income exceeds 7,479 euros (value referring to the 1st step), then the worker will be covered by the two rates: the average rate applies to the 1st part of the taxable income (that is, income up to 7,479 euros), and the standard rate applies to the 2nd part of taxable income.

To divide your taxable income into two parts, you must consider the bracket whose maximum limit fits your income – this limit is your 1st part of the income and will be taxed at the average rate of that bracket.

What is left over is considered the 2nd part of your taxable income, which passes to the next higher bracket and is taxed at the normal rate for that bracket.

Let’s go back to the previous example:

A worker whose taxable income is 9,896 euros annual payments must consider the maximum limit of the first step (7,479 euros), since this fits in your income.

IRS 2023 brackets

The maximum limit of the second tier (11,284 euros) exceeds this value.

Thus, the income of this worker will be divided into two parts:

• First part: 7,479 euros.
  This amount is taxed at the average rate of the first step of the IRS (14.5%).
  The bills are then €7,479 x 14.5% = €1,084.55.
• Second part: 2,417 euros (9,896€-7,479€).
  This part of the income will be taxed at the normal rate of the second income tax bracket (21%).
  The calculation is then as follows: 2,417€€ x 21% = 507.57€.

In this case, the value of the IRS collection, that is, the tax to be paid to the State before discounting the collection deductions, is 1,592.12 euros, which is the sum of the two parts (€1,084.55 + €507.57).

IRS 2021 brackets (same as 2020)

In 2019, the brackets were the same but with lower annual taxable income limits, as shown in the table below.

IRS 2019 brackets

IRS scales and withholding tables

Despite being often confused, the IRS scales and the withholding tax tables are not the same thing and may not even coincide.

While the IRS scales allow you to understand how much tax you have to pay at the end of each tax year, the withholding tables show you how much you will advance each month for this purpose.

The IRS withholding is an instrument that allows the State to collect revenue throughout the year through a monthly discount to workers, trying to anticipate what the annual tax to be paid should be.

However, there is a lag between the withholding tax and the final tax, which is usually calculated in the spring. In the vast majority of cases, this difference results in a reimbursement to be received by the taxpayer, which is partly due to the withholding above what is necessary and the deductions to which he is entitled.

At the end of the fiscal year, the Tax Authority will calculate the annual tax to be paid — based on declared annual income and deductions — then comparing this value with the amount of withholding tax made throughout the year.

In the case of having discounted less, the taxpayer receives a notification from Finance requesting the payment of the remaining amount. If, on the contrary, you have withheld more than you were supposed to, you are entitled to a refund, that is, a refund from the IRS that you overpaid.