Who needs to file an income tax return? See the criteria

Income tax is a reality for many Brazilians every year. However, not everyone is aware of who actually needs to declare this tax obligation. With a series of criteria established by the Receita Federal, it is essential to understand whether you fit the conditions that require you to file an income tax return. 

Who needs to file an income tax return?

Income tax is one of the most important tax obligations for Brazilian taxpayers. Every year, millions of people are faced with the need to account to the tax authorities by declaring their income, assets and rights to the Receita Federal. However, not everyone is aware of the criteria that determine who needs to make this declaration.

1. Annual Income

Annual income is one of the main criteria that determine the obligation to file an income tax return. The Federal Revenue Service sets an annual income limit at which taxpayers are obliged to report to the tax authorities. This limit is adjusted annually in accordance with current legislation and the country's economic conditions.

For the calendar year 2023, for example, the annual income limit for filing an income tax return has been set at R$ 28,559.70. This means that taxpayers with an annual income equal to or greater than this amount are required to file a tax return.

It is important to note that the annual income considered for the purpose of filing an income tax return includes all income received by the taxpayer throughout the year, whether from salaries, pensions, rent, self-employment or any other source of income.

In addition, the IRS also takes into account the income of dependents, if any, in the composition of the taxpayer's annual income. This means that even if the person filing the return does not exceed the annual income limit, the inclusion of dependents' income can alter this condition, making the return mandatory.

It's worth noting that failure to file your income tax return when required can result in fines and penalties from the Federal Revenue Service. Therefore, it is essential that taxpayers are aware of the annual income limit and fulfill their tax obligations correctly and on time.

2. Professional Activity

In addition to annual income, the professional activity carried out by the taxpayer is another crucial factor in determining whether an income tax return is required. While many salaried workers have their income tax returns withheld at source by their employer, other individuals who carry out different professional activities may face different tax requirements.

For example, self-employed professionals, individual entrepreneurs and business partners are among those who must be aware of their tax obligations, regardless of the amount of their annual income. These individuals have a responsibility to declare their income tax, even if their annual income is below the limit stipulated by the IRS. This is because their sources of income can be more varied and complex than simply a monthly salary.

In addition, for self-employed professionals and entrepreneurs, it is essential to calculate and pay the tax due in a regular manner, thus avoiding future problems with the IRS. These taxpayers are often subject to different tax regimes, such as Lucro Real, Lucro Presumido or Simples Nacional, and must follow the specific rules and procedures of each one.

On the other hand, even those who are not self-employed or in business may be subject to the obligation to file an income tax return due to other sources of income besides formal employment. For example, income from rents, financial investments, pensions, retirement pensions, among others, can influence the need to file an income tax return, regardless of the taxpayer's main professional activity.

3. Assets and Rights

In addition to annual income and professional activity, the assets and rights owned by the taxpayer play a fundamental role in determining whether an income tax return is mandatory. The IRS requires taxpayers to report all their assets, such as real estate, vehicles, financial investments, among others, as well as the rights they own, such as shares in companies, investments in investment funds, among others.

It's important to note that owning assets and rights above a certain value can influence the need to file an income tax return, even if the taxpayer's annual income is below the limit set by the IRS. This is because the purpose of the Income Tax return is not only to tax the taxpayer's income, but also to ensure transparency and the correct taxation of all their assets.

For example, if a taxpayer owns a property whose value exceeds the limit set by the IRS, they are obliged to include this property in their income tax return, regardless of their total annual income. Similarly, if a taxpayer has financial investments, such as shares, fixed-income securities or investment funds, whose total value exceeds the established limit, they are also obliged to declare these investments.

It is also important to note that the IRS has data cross-checking mechanisms that allow it to verify the veracity of the information declared by taxpayers. It is therefore essential that taxpayers are transparent when declaring their assets and rights, thus avoiding problems with the tax authorities in the future.

4. Capital Gains

In addition to the traditional criteria such as annual income and ownership of assets and rights, capital gains also play a significant role in determining whether an income tax return is mandatory. Capital gains refer to profits made from the sale of assets or rights, such as real estate, vehicles, shares, among other investments.

To understand this better, when a taxpayer sells an asset or right for more than its acquisition cost, they make a capital gain. These gains are subject to taxation and it is essential that they are declared correctly in the income tax return.

Brazilian legislation establishes specific rules for the taxation of capital gains, depending on the type of asset or right sold and the length of ownership. For example, in the case of real estate, if the taxpayer sells a property and obtains a capital gain, they are subject to a tax rate that varies according to the amount of the gain and the length of time they have owned the property. If the property has been owned for less than five years, the tax rate is higher than if the property has been owned for more than five years.

In the case of financial investments, such as shares or investment funds, capital gains are subject to taxation according to the regressive Income Tax table, which establishes rates that decrease with the length of time the investment is held. The longer the investor keeps the investment, the lower the tax rate to be paid on capital gains.

5. Rental income

Rental income is one of the sources of income that can influence whether or not you have to file an income tax return. If the taxpayer receives rents from properties they own, they must declare these amounts in their income tax return, regardless of their total annual income.

The declaration of rental income is a requirement of the Federal Revenue Service to ensure the correct taxation of this source of income and prevent tax evasion. Amounts received as rent must be reported on the "Taxable Income Received from Individuals and Abroad by the Holder" form, using the specific code for rental income.

It is important to note that, in addition to the gross amount of rent received, taxpayers can also deduct some expenses related to the rented property, such as IPTU, condominium, maintenance and repair expenses, among others. These expenses must be documented and reported on the income tax return under "Payments Made".

6. Residents abroad

For Brazilians living abroad, the issue of declaring income tax can be a little more complex due to the particularities involved in tax legislation. Determining whether residents abroad are required to file an income tax return depends on a number of factors, including the source of income, tax residence and international double taxation treaties.

In general terms, Brazilians living abroad are obliged to file an income tax return if they maintain links with Brazil that constitute their tax residence in the country. These links can include, for example, owning real estate in Brazil, holding bank accounts or financial investments in the country, or earning income from Brazilian sources.

However, even if a Brazilian resides abroad, they may still be subject to taxation in Brazil on certain income earned in the country. For example, if a Brazilian living abroad owns property in Brazil that generates rental income, they are obliged to declare this income on their Brazilian income tax return, regardless of where they live.

In addition, it is important to note that Brazil has international double taxation treaties with several countries, with the aim of avoiding double taxation of income obtained by residents in a country other than their country of origin. These treaties establish specific rules for the taxation of income obtained in the country of residence and the country of origin, ensuring that taxpayers are not double-taxed.

7. Other Specific Situations

In addition to the most common criteria such as annual income, professional activity, ownership of assets and rights, capital gains, rental income and residence abroad, there are several other specific situations that may require an income tax return. Below, we highlight some of these situations and how they may impact on the obligation to file a tax return:

• Income Exempt or Taxable Exclusively at Source: Even if the income received is exempt from taxation or taxable exclusively at source, as is the case with income from savings accounts, employment indemnities, or income from financial investments taxed exclusively at source, it may be necessary to file an income tax return if the taxpayer meets other conditions that require a return.
• Stock Exchange transactions: If taxpayers have carried out stock exchange transactions, such as buying and selling shares, ETFs, real estate funds, among other assets, they are subject to taxation on the gains obtained from these transactions. Even if the gains do not exceed the exemption limit set by the IRS, it is necessary to declare these operations in the income tax return.
• Receipt of compensation: If the taxpayer has received compensation from insurance, lawsuits, or other types of compensation, it is necessary to assess whether these amounts are subject to taxation and whether it is necessary to declare them in the income tax return. In some cases, the amounts received may be exempt from taxation, but it is important to check the legislation in force to ensure that this income is taxed correctly.
• Alimony Income: If the taxpayer receives alimony, either as a beneficiary or as a payer, it is important to understand how this income should be declared in the Income Tax return. Both the amounts received as alimony and the amounts paid may have an impact on the income tax return and must be reported in accordance with current legislation.
• Receipt of Inheritance or Donation: If the taxpayer has received an inheritance or donation, it is necessary to assess whether these amounts are subject to taxation and whether it is necessary to declare them in the Income Tax return. In some cases, the amounts received may be exempt from taxation, but it is important to check the legislation in force and follow the Receita Federal's guidelines to ensure the correct taxation of this income.

IRS criteria

The obligation to declare income tax depends on a series of criteria established by the IRS, including annual income, professional activity, ownership of assets and rights, capital gains, rental income, residence abroad, among others. It is essential to understand these criteria and ensure that your declaration complies with current legislation. 

In the event of doubts or specific situations, it is advisable to seek professional advice to avoid future problems with the IRS.

See also: 10 profitable businesses in Brazil

April 3rd, 2024