With pay packets shrinking, workers are starting to look at their tax affairs, writes CAROLINE MADDEN
BACK IN the heady days when taxpayers were cash-rich and time-poor, poring through tax credit certificates and pay slips with a fine-toothed comb in search of savings simply didn’t seem worth the effort.
But now that pay packets have shrunk, workers are starting to actively manage their tax affairs rather than assume that their payroll department or the Revenue will make sure they’re getting their full entitlements.
Also, with the State’s coffers alarmingly bare, the Revenue is no doubt on the prowl for untapped sources of tax.
Individuals should take extra care not to fall foul of the tax man by failing to declare income or miscalculating their tax bill.
And with unemployment on the rise here, it’s more important than ever for Irish individuals working overseas to meet their foreign tax obligations so as not to jeopardise their current and future visa entitlements.
SHRINK YOUR TAX BILL
According to Cathal Maxwell of www.paylesstax.ie, taxpayers who wouldn’t have bothered investigating their full entitlements in the past are becoming more aware of what they can claim back for tax purposes now that money is tighter.
There has been a notable increase in the number of people claiming tax relief on their medical expenses.
“They wouldn’t have kept their receipts and they mightn’t really have been very conscious of it [before now],” he says. “In the better times we were all guilty of that in some respects.”
Taxpayers are entitled to claim relief on certain medical and dental expenses that they – and their dependants – incur, which cannot be reimbursed through private medical insurance.
Tax relief on medical expenses is available at the standard rate of tax, which is 20 per cent in 2009 (with the exception of nursing home expenses, on which relief is available at the higher rate).
So, for example, if an individual claims relief on €100 of medical expenses, they will get a refund of €20.
Claims for medical expense relief can be made on a Form Med 1, available for download on www.revenue.ie.
Individuals claiming tax relief on dental costs should ask their dentist to complete and sign a Med 2 form. Although there’s no need for claimants to send their medical receipts to the tax office, they should hold on to them for six years.
Maxwell also advises taxpayers to check that they are claiming full relief on service charges. Relief can be claimed at 20 per cent on domestic waste charges of up to €400 a year, which equates to a maximum tax credit of €80 in 2009.
Married couples should also check that they are receiving the home carer’s tax credit of €900 if one spouse works in the home minding a dependant person.
Don’t assume that the Revenue knows the full details of your personal circumstances, he advises.
“The Revenue are only working on whatever they know about you. It could go back years,” he explains. “And they may not have updated to allow you the proper credits.”
One deduction sometimes overlooked is the flat-rate expenses allowance applicable to certain classes of employee. For example, air cabin crew members are entitled to a flat rate deduction of €64 per year. (A full list of these allowances is available at www.revenue.ie/en/tax/it/employee-expenses.html#section1).
Taxpayers should check their tax credit certificate, which is sent out by Revenue every year, to make sure that their full entitlements have been granted.
Individuals can make a claim by ringing their local tax office. A number of credits can also be claimed online by logging on to www.revenue.ie and registering for the ‘PAYE anytime’ service.
UNDECLARED FOREIGN RENTAL INCOME
According to Terri Clune, founder and managing director of www.taxback.com, the issue of undeclared foreign rental income is set to become a source of major anxiety for Irish individuals who snapped up investment properties across Europe in recent years.
Many investors are simply letting the rental income roll up in a bank account in the country where their foreign property is located, and have neglected to inform either the local or Irish tax authorities of this income stream. “They’re not really sure what to do, and they don’t bother telling anybody that they have this amount,” Clune says.
Often investors simply aren’t aware of their obligations, but pleading ignorance won’t cut it with the Irish Revenue, which has given indications that it intends to investigate the area of overseas property. And even though the Irish income tax liability arising from the foreign rental income may be fairly small, interest and penalties are applied to overdue tax. Over time it could snowball into a very hefty bill.
Therefore, time is of the essence for investors who want to put their affairs in order before they appear on the Revenue’s radar.
In order to set their tax affairs straight, investors should file a tax return in the country where the property is located (for each year in which they earned rental income). Clune says they can write off many expenses against their foreign rental income, such as depreciation, trips over to check the property, and so on. In many cases this will reduce the taxable amount considerably.
Ireland has double taxation treaties with all EU states, which means that the investor will either be exempt from paying tax in one of the countries, or else they will be granted a credit for tax already paid. “You can then bring the rent home to Ireland and be secure in knowing that your affairs are all up to date,” he says.
Filing a return in another European country requires expert knowledge of the local tax system and the relevant double taxation treaty with Ireland and, for this reason, the assistance of experts, such as www.taxback.com or www.foreigntaxreturns.ie, is generally advisable.
THE INCOME LEVY QUAGMIRE: SELF-ASSESSED INDIVIDUALS BEWARE
Although their PAYE counterparts have been suffering the income levy since January, most individuals in the self-assessment system (which includes the self-employed and people with income that can’t be fully taxed through the PAYE system), are still bracing themselves for the impending blow of this new charge as they pay tax just once a year.
Self-assessed taxpayers have to pay any balance of income tax outstanding for 2008, along with a preliminary tax payment for 2009, when they file their 2008 tax return by the pay-and-file deadline of October 31st. However, the lack of information about the interaction of the income levy with the preliminary tax payment is expected to cause confusion this year.
When calculating their preliminary tax bill, self-assessed people generally choose between paying 90 per cent of their estimated tax liability for the current tax year, or 100 per cent of their tax liability for the previous year.
“The tendency with people is that they pay the 100 per cent unless their income is well down in the current year,” Maxwell says. Those who have seen their income drop considerably in 2009 will probably opt for the 90 per cent rule, and in this case the income levy situation is relatively straightforward.
The relevant rate is applied to their estimated taxable profit (before deducting capital allowances) for 2009. Maxwell explains that this amount is added to their estimated income tax and PRSI liability for the year, and 90 per cent of the total is paid in preliminary tax.
The problem lies with those who decide to use the 100 per cent rule – i.e. they base their 2009 preliminary tax on their 2008 tax liability. Even though the levy was not in force last year, they must include it in their calculation. However, this point has not been adequately highlighted and could result in the underpayment of tax by self-assessed individuals.
A limited amount of information on the application of the income levy to self-employed individuals is available in the Revenue leaflet Income Levy – Frequently Asked Questions, on www.revenue.ie. However, taxpayers with complex queries should consult a tax expert if they are worried about compliance.
The income levy rates doubled on May 1st following the supplementary budget in April, which means that for employees there are two sets of rates for the year. However, self-employed people must use the annualised composite rates calculated by Revenue for 2009, which are as follows:
1.67 per cent: income up to €75,036 p.a.
3 per cent: income between €75,037 and €100,100 p.a.
3.33 per cent: income between €100,101 and €174,980 p.a.
4.67 per cent: income between €174,981 and €250,120 p.a.
5 per cent: income in excess of €250,120 p.a.
WORKING OVERSEAS
Navigating our own tax system is tricky enough, let alone grappling with foreign tax regimes. But for Irish people who have migrated to work overseas, an understanding of their tax obligations is essential to avoid jeopardising their visa entitlements.
Individuals on working holiday visas in Australia are not required to file a tax return there, Clune says, but if they are on a skilled migrant visa then they are obliged to submit a return. The Australian tax year ended on June 30th, and taxback.com’s Australian offices are busy at the moment filing returns and applying for tax refunds for Irish workers.
Irish individuals working in Australia may be entitled to a refund at the end of a tax year if they arrived there in the middle of the year, as they might not have used up all their tax credits for that year. On top of that, it’s possible to claim back a secondary tax known as superannuation. However, this can only be reclaimed after the person has left Australia.
Students currently living it up in the US on a J1 summer work visa may not realise that they also have tax obligations. They’re legally obliged to file a US tax return if their earnings there exceed €3,650 in 2009.
Typically, J1 students apply to taxback.com once they return home in the hopes of getting some tax back, and the company can also file a US return on their behalf. Clune points out that failing to file a return will create problems if they apply for a green card in the future.
Case study: tax relief for parents
Eamon is aged 66, married and recently retired. He receives the State pension, and a small occupational pension. His total income for the 2008 tax year was €25,000.
Fortunately, his four children are all in good jobs and want to help their parents. Each of the children has an annual income of €50,000 and has agreed to contribute €1,500 per annum to boost Eamon’s annual income by a total of €6,000. Is there any tax relief available to them for supporting their parents?
Yes, provided it is done by way of deed of covenant. If each of the children covenants 5 per cent of income (€2,500) to Eamon, the tax position will be as follows:
Eamon receives €10,000 free of income tax, instead of the €6,000 which the children had intended giving to him (which would also have been tax-free)
Assuming the children all pay tax at the higher rate of 41 per cent, the net cost of the payment to Eamon for each of them is €1,475, a little below what they had intended paying. The total net cost to the children is €5,900. (You should obtain independent professional advice before implementing any plan along the lines of the above to ensure that the facts of your own particular circumstances will ensure that the tax savings are achieved.)
Case study provided by www.paylesstax.ie
Case study: self-employed versus employee
Generally there is a mistaken belief that, as a self-employed person, you will automatically pay less tax and therefore must be better off. This is not necessarily the case.
Self Employed
John, who is single, is a self-employed consultant who works from home. His main business expense is his car, which is leased and has a cost price of €35,000. His annual profit after deducting sundry expenses is €70,000 before the costs of maintaining his car, which amount to €16,300 made up as follows:
Car service repairs€1,500
Petrol€5,800
Tax insurance€1,500
Leasing Costs€7,500
Total €16,300
John's business travel accounts for 75 per cent of his total mileage for the year, amounting to about 30,000 business miles.
Net Profit Remaining:
Profit before tax and car expenses€70,000
Deduct car expenses(€16,300)
Deduct tax/PRSI for year 2008 (€18,000)
Net profit after tax and all expenses€35,700
Employee
If John was an employee with a company car, all expenses paid, on a salary of €70,000 per annum, his take-home pay would be €48,000. This is a very substantial difference. In reality John's salary is likely to be less because of the car benefit that he receives. Let's say it is €60,000. His net take-home pay would then be €43,500 – far greater than the net profit of €35,700 as a self-employed consultant.
You can see from the above examples that John would probably be better off as an employee, with a far greater net income. One of the reasons for this difference is that as a self-employed person he is not entitled to the PAYE tax credit which is worth €1,830. In addition, the amount of the car expenses qualifying as a tax deduction for John in the above example is restricted to €10,657, so that John has to bear the difference of €5,643 out of his after-tax income.
Summary
Each case has to be carefully examined to see what the net benefit is after taking the tax position into account.
(You should obtain independent professional advice before implementing any plan along the lines of the above to ensure that the facts of your own particular circumstances will ensure that the tax savings are achieved.)
Case study provided by www.paylesstax.ie
