UPDATE ON IRS TABLES: WHAT IS THE REAL IMPACT ON PORTUGUESE INCOMES?

Much has been said about the update of IRS (Income Tax) tables in the second half of 2023. On one hand, the majority of taxpayers will see an increase in their incomes starting in July. On the other hand, this new IRS table model, which includes a new calculation formula, has consequences for the adjustment of this tax settlement, potentially reducing IRS refunds drastically or even causing many taxpayers to owe a significant amount to the government.

Why does this happen? It’s because with the new update of IRS tables, the model that comes into effect is more aligned with the IRS tax brackets that are considered in the annual tax settlement. If the withheld amount is close to the amount owed, refunds are smaller or almost nonexistent. If the withheld amount is less than what is owed and there are not enough deductions to offset it, you end up owing money to the government. Therefore, after filing your IRS declaration, you will have to pay the corresponding amount.

However, it’s difficult to say whether a taxpayer will have to pay IRS or not because it depends on their income, family situation, number of dependents, and, of course, the deductions they claim. Nevertheless, when filing the IRS declaration next year, those with lower incomes may find themselves in a situation where they have to pay this tax if they only reach the maximum threshold for general family expenses and rent. If there are expenses related to health and education, this scenario can change. So, it’s impossible to speak in general terms about whether taxpayers will receive an IRS refund.

One thing is certain. It is currently possible to know whether you will receive more net salary and how much that will be since the tables and calculation formula are already known. In this article, we present some examples and explain the calculations to consider.

IRS TABLES AND CALCULATION FORMULA FROM 1ST TO 2ND SEMESTER

Before the start of 2023, it was already known that there would be two IRS table models this year. One that would apply in the first semester and the other in the second. As announced, in the first semester, the withholding tax tables for IRS would follow the same logic as in previous years. In other words, the IRS withholding was based on a percentage defined by the IRS tables, taking into account income, family situation, and the number of dependents.

In the second semester, the model would be different. In addition to the percentage of IRS withholding changing (mostly decreasing), a new calculation formula would be applied. This formula follows a logic of maximum marginal tax rate, with an allowance to be deducted. When the effective monthly withholding rate at the limit of the bracket is calculated, the final withholding amount is determined based on income, family situation, and number of dependents.

However, the changes don’t end there. Those with up to two children will benefit from a different calculation, as there is an additional allowance to be deducted for each dependent. The allowance amounts range from 21.43 euros to 42.86 euros (depending on whether there are two income earners or just one).

Finally, there is another change for those with three or more children. These dependent workers will benefit from a 1% discount on the maximum marginal tax rate of the worker’s bracket, with the allowance and additional allowance per dependent remaining unchanged.

SIMPLIFIED REGIME UNDER IRS AND IRC

One of the novelties introduced by the 2023 State Budget is the possibility of including cryptoassets sales under the simplified regime of IRS and IRC.

In the initial proposal of the State Budget, a coefficient of 0.15% was planned to be applied. This means that if the income does not exceed 200,000 euros, which is the maximum limit for the simplified regime, the taxable amount would be equivalent to only 0.15% of the income.

For example, if an activity involving cryptoassets generates an income of 100,000 euros, the taxable amount would be 15,000 euros. The applicable IRS or IRC rate would be calculated based on this amount.

However, after the discussion of the 2023 State Budget, this measure remains in effect but with a more penalizing coefficient for activities such as mining due to their significant environmental impacts resulting from energy consumption. Therefore, for mining income that does not exceed 200,000 euros, a coefficient of 0.95% is applied.

Using the same example, if the activity generates income of 100,000 euros, the taxable amount would be 95,000 euros, to which the applicable IRC or IRS rate would be applied.

DOES THE INCREASE IN MONTHLY SALARY COMPENSATE?

It all depends on the individual case, and one can only have a clear idea after seeing the adjustment of the IRS settlement next year. For single taxpayers without dependents, most increases range from 10€ to 30€ per month. Therefore, when calculating, if you take home between 60€ to 180€ by the end of the year, it may not compensate for the decrease or loss of IRS refunds received in 2023.

In the case of a married employee (with two income earners) and two dependents, although the amounts may be slightly higher, the scenario won’t be much different. However, if you are married but the only income earner and have two dependents, then your net salary will see a more significant increase. However, if you don’t plan your IRS well for next year, you may have an unpleasant surprise when filing the IRS declaration in 2024.

In conclusion, the updates to the IRS tables may seem very beneficial for now because they will bring more money home. The problem is that when it comes time to settle accounts with the government, many taxpayers will not only lose their right to an IRS refund but will also have to pay a high amount of IRS. In a year of financial difficulties for many families, this measure can have serious financial consequences next year. So, be prepared and don’t make plans relying on an IRS refund.

If you want to learn more about this subject, at Mário Moura Contabilidade, we are available to provide more information on this and other topics.

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See you soon,
Mário Moura Contabilidade