Have you ever heard of income aggregation? In some situations, it can be the most advantageous way to declare income for Portuguese Personal Income Tax (IRS).
Although the Portuguese Tax and Customs Authority (Autoridade Tributária e Aduaneira – AT) taxes certain types of income separately, taxpayers have the option to choose the aggregation regime.
Find out more about this taxation method and whether it could help you reduce your tax bill.
Income Aggregation for IRS: When Is It Worth Choosing This Tax Regime?
Every year, when the IRS filing season begins, taxpayers are faced with a number of questions.
One of the most common is whether to choose income aggregation or separate taxation. After all, which option is more beneficial?
The truth is that there is no single answer that applies to everyone. Each taxpayer’s circumstances are different and should be assessed individually.
Since Portuguese tax law gives you the option to choose between the two regimes in certain cases, it is worth comparing the results to determine which is more advantageous for your situation.
Below, we explain how each taxation regime works so you can better understand your options.
The Difference Between the Two Tax Regimes
First, it is important to understand the distinction between income aggregation and separate taxation.
Under the separate taxation regime, certain types of income are taxed at a flat withholding or special tax rate.
This regime generally applies to:
- Investment income;
- Rental income;
- The net positive balance of capital gains and capital losses.
Under the income aggregation regime, income that would normally be taxed separately at a flat rate is added to your remaining taxable income.
In practice, this means that instead of being taxed separately, these amounts are combined with your other earnings—such as employment income—and taxed according to the progressive IRS tax brackets.
Separate taxation is the default regime applied by the Portuguese Tax Authority when processing IRS returns.
If you wish to aggregate your income, you must actively select this option when completing your tax return.
When Is It Worth Aggregating Income for IRS Purposes?
As mentioned above, aggregation is not always the most beneficial option.
You should carefully assess your personal circumstances and, ideally, perform tax simulations with the assistance of a Certified Accountant before making your decision.
That said, there are some situations in which aggregation may be advantageous.
- Lower Levels of Income
Based on the IRS tax brackets, taxable income of up to 15,216 € is subject to marginal tax rates of up to 26,5%.
Generally, income aggregation tends to be beneficial whenever the taxpayer’s applicable marginal IRS rate is lower than the 28% flat tax rate applied under separate taxation.
On the other hand, if aggregating your income results in it being taxed at a marginal rate higher than 28%, separate taxation may be the more advantageous option.
For this reason, it is always advisable to carry out a tax simulation before deciding.
- Negative Balance Between Capital Gains and Capital Losses
A negative balance between capital gains and capital losses occurs, for example, when you incur losses from buying and selling shares or other financial assets.
If you choose to aggregate this income, those losses may be offset against future capital gains over the following five tax years, subject to the applicable legal conditions.
How to Choose the Income Aggregation Regime
As previously mentioned, separate taxation is the default regime applied by the Portuguese Tax Authority. Therefore, it is up to the taxpayer to opt for income aggregation if desired.
Before making this choice, it is highly recommended to simulate both taxation methods to determine which one offers the greatest tax benefit.
It is also important to remember that if you choose to aggregate income from a particular category, you must aggregate all income belonging to that same category.
This option is selected when completing your IRS tax return by ticking the relevant field.
For example:
- Annex E should be completed if you wish to aggregate investment income;
- Annex F applies to rental income;
- Annex G is used for capital gains;
- and so on, depending on the category of income involved.
We understand that this can be a complex topic for many taxpayers. If you have any questions, feel free to contact us or leave a comment.