what it is and how to use it to your advantage

O inclusion in IRS will be the best option? Or is it better to choose autonomous taxation?

The way you choose to declare different types of income can make you pay more or less tax. Although the Tax Authority (AT) taxes some income separately, the taxpayer can choose another regime that is more favorable to him.

How does the IRS aggregation work?

Income is not all taxed in the same way.. Dependent work or pensions are taxed by aggregation, therefore, taxed progressively (according to the normal and average rate of the IRS brackets).

Others are taxed autonomously, as is the case with income from capital (category E), property income (category F) and some income from equity increases (category G), such as the positive balance between gains and losses on the sale of shares.

The IRS Code, however, allows autonomously taxed income to be included with other income, thus being subject to progressive IRS rates. The higher your income (or the sum of incomes), the more tax you pay.

And how is the incorporation carried out? The first thing to know is that IRS rates are not levied on gross annual income, but on taxable income. Remember that the taxable income is obtained by deducting specific deductions from the gross annual income.

In view of the amount of taxable income, the taxpayer is placed in a certain income bracket and the respective IRS rate is applied, thus obtaining the amount of the collection.

It is possible to deduct a set of deductions from this value (general family expenses, health, education, among others), thus obtaining the IRS settled, that is, the amount of tax to be paid.

If, by hypothesis, you withheld at source more tax than calculated by the AT, you are entitled to receive a refund. If the withholding tax has fallen short, you will have to pay the missing tax.

What is autonomous taxation?

All income, in addition to dependent work or pensions, may be included: interest on deposits, dividends, financial and property insurance premiums.

However, and as mentioned, some income is not automatically added to this “cake” and is taxed separately. That is, they are taxed differently. This is called autonomous taxation, which applies to:

• Capital income, which includes, for example, interest on bank deposits, dividends or income obtained through units in investment funds. This income, subject to withholding at source, is subject to a release rate of 28%.
• property income: for example, lease of real estate or rental of machinery and furniture that exist there.
• Positive balance between pluses and minuses resulting from certain operations: for example, the sale or transfer for consideration of shareholdings and other securities or intellectual property.

Both property income and some equity increments, such as the positive balance between capital gains and capital losses on shares, are subject to a special rate (autonomous rate of 28%) – applied only at the time of the annual tax assessment -, as per Article 72 of the IRS Code.

Autonomous taxation is, by default, the option assumed by the Tax Authority. Therefore, if you want to opt for the IRS aggregation, you will have to choose the aggregation option when filling out your declaration.

Opting for aggregation thus means adding this type of income to others, paying the IRS rate corresponding to this sum.

In what cases does inclusion in the IRS pay off?

Choose the aggregation can be a good option in some cases, but a penalty in others.. Therefore, before submitting your statement, it is convenient to do the math and understand what is most advantageous.

Let’s look at some situations where it can pay off.

One of the situations in which inclusion in the IRS brings advantages is if you have lower incomes.

That is, and according to the tables referring to 2022, if you have a taxable income of up to 15,216 euros, you will pay a (progressive) IRS rate of up to 26.50%, which is lower than the rate of 28%.

In this case, your income subject to autonomous taxation can be added to your work income. They are no longer taxed at 28% and are now taxed according to the previous scales.

IRS 2022 brackets

Looking at the 2022 income tax brackets (which became 9, instead of the usual 7 income levels) you can already see if it pays off.

If, after being aggregated, the income exceeds 15,216 euros, the aggregation is no longer advantageous. If they fall short, it is a sign that this option is worth choosing.

Example:

Let’s assume you are a dependent, single worker who has earned €14,000 in wages and interest from a bank deposit of €100.

If the interest were subject to taxation at the withholding rate, it would have to pay 28 euros (100 euros x 28%).

In the option for aggregation, the 100 euros of interest are added to the 14,000 euros of wages, for the purposes of calculating the taxable income. Subtracting the specific deduction of 4,104 euros, you would obtain a taxable income of 9,996 euros, an amount classified in the second tier, with a rate of 23%.

As income from dependent work already fills the first tier (up to 7,116 euros), interest would be included in the second tier, taxed at 23%. This means that you would only pay €23 (100 x 23%) tax on that interest.

Take note: The amount corresponding to the withholding tax is withheld at source. If you want to include it, you must ask the bank for a statement that proves this withholding. This amount will then be subtracted from the tax to be paid.

The inclusion in IRS is also advantageous when there is a negative balance between the gains and the downsides. That is, for example, if you lost money with the purchase and sale of shares.

By including this loss, it can be deducted from the capital gains that it may have in the five years that follow.

How to do the embedding?

As AT assumes the autonomous taxation of income that is not from work, the taxpayer will have to opt for aggregation when filling out the declaration.

This also means that should simulate both situations so that you can understand if you are really going to take advantage of the IRS inclusion or if it is better to keep the initial option.

Another fact to take into account is that when including income from a category, it must include all those who belong to that category.

In order to inform the Tax Authority that you intend to include certain income, you must mark this option in the annex of the declaration corresponding to the category of income that you want to include.

For example, to aggregate income from capital, you must complete Annex E, using the codes referred to in the Finance Portal instructions. If you intend to include income from real estate, you must mark it in Annex F. The inclusion of capital gains in the IRS is done in Annex G.

Simulate to be able to make the right choice

Deciding on autonomous taxation or aggregation is not always straightforward and requires your utmost attention, in order not to be penalized.

Therefore, it is worth wasting a few minutes and doing a simulation on the IRS declaration for both situations, aggregation and autonomous taxation, opting for the situation that is more compensatory and finding out if joining all the income in one category is more beneficial.