March 28, 2023

To enclose or not to enclose? A decision that can cost hundreds of euros

Taxpayers with income from capital or property can choose how they want to be taxed: by stand-alone taxation or aggregation, a decision that can lead to more or less savings.

“When we have income that can be taxed at a flat/deductible rate, it’s convenient to check what pays more: include it (add those amounts to other income) and see what the applicable rate will be, or tax a flat rate on your own (without addition to residual income)”, a source from the Tax Department of the law firm CCA explains to “Executive Digest”.

The inclusion of income “means that all the taxpayers’ incomes are added together”, depending on the result of which the rate (from 14% to 48%, excluding surcharges) to be applied to all incomes is determined. As a general rule, according to the CCA, autonomous taxable income – capital income, property income and capital gains – are subject to a rate of 28%. “It’s a rate that proves to be competitive when we consider that, in the case of the sum, the 28.5% range covers income from (just over) €10k.”

What to consider

Deep down, try to answer the question: if I add up all my earnings, will I still have less than 28%?

For example: if you receive an annual salary of 8,890 euros, 1,000 interest and include them, the rate applicable to the amount of 9,890 euros will be 14%. In this case, it would make sense to include. On the other hand, if wages and interest reach 45 thousand euros, the interest rate that will apply in case of summation would increase to 37%. In this case, the compounding makes no sense, as the interest component rate would be higher than 28%.

“As a general rule, stand-alone taxation tends to be more advantageous for the majority of taxpayers, although in the case of capital losses from the sale of shares, consideration should be given to including this negative value as it will allow this negative to be reported balance for the following years, which may mitigate it in the five years following the future capital gains”, underlines the law firm.

If you choose to aggregate, you must do so on the appropriate IRS Model 3 schedules by selecting the appropriate boxes and fields, which vary depending on the type of income you earn. Therefore, it will always be necessary to select the relevant schedule (E for capital income, F for property income, G for capital gains). Depending on the type of income actually obtained, it is necessary to fill in the corresponding tables and figures.

For example:

a) In the case of rental income from real estate (Category F – income from real estate), the choice for the tax regime (including or independent taxation) is made in table 6F of Appendix F.

b) In the case of dividends from national shares (Category E – capital income), the choice of tax regime (consistency or stand-alone taxation) is made in Table 4A of Annex E.

c) In the case of capital gains resulting from the sale of shares (Category G – Capital Gains), the choice for the tax regime (incorporation or autonomous taxation) is made in Table 15 of Appendix G.

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