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Tax Saving Tips - Part 2

Hard luck to Waterford last weekend. What can you say? They came up against a team that was on fire on the day. Limerick were like a human wrecking ball that smashed everything before them. Their whole team was excellent and had 3 or 4 wonder performances on top of that. Huge credit to Waterford for the season they had. They couldn't have given any more and they never gave up. They have come a long way in a year. I am sure the Waterford fans will look forward to getting behind their team in the Summer of 21. Well done to Limerick. This is a team that has already achieved great things. They have serious possibilities for further success too.

As an aside I must congratulate the ladies of Kilkenny on their All-Ireland victory. They fought like savages all through and their skill and never say die attitude got them over the line. A huge victory for them after losing the last 3 finals. And super to see great hurlers like Pat O'Neill, Philly Larkin, and Tommy Shefflin involved.

Last week, in part 1 of this, we spoke about how you can minimise your tax bill and exchange traded funds [ETFs]. In case you missed it Read here

This week we will cover other tax-saving tips and timelines.

"Worried about an IRS audit? Avoid what's called a red flag. That's something the IRS always look for. For example, say you have some money left in your bank account after paying taxes. That's a red flag"  Jay Leno

Earned Income Credit

This is a credit for those with self-employed trading income. It also applies to company directors who own 15% or more of the company. PAYE workers get a PAYE tax credit and those who were self-employed didn't get this credit. So, a self-employed person on the same income as a PAYE worker paid more tax. The PAYE credit is €1,650 and has been for years. The Earned Income Credit came into existence in 2016 at €550. The goal of the previous and current government was to increase it so that it has the same value as the PAYE credit. This will happen in 2021. For 2019 the credit is €1,350 and for 2020 it is €1,500. It works the same way as the PAYE credit in that your self-employed income has to be more than 5 times the credit. Otherwise, you don't get the full value.

Tom Gunne is single and is a self-employed mechanic with a profit of €32,000 in 2019. His Income Tax liability is as follows

€32,00020%€6,400
Less Tax credits
Single Person€1,650
Earned Income Credit€1,350
Net Income Tax liability€3,400


Overcome with emotion on Valentine's day, Tom got down on one knee and proposed to his girlfriend Gina. They got married in late 2019. For 2020 they will do a joint tax return. In 2020 Tom has a profit of €40,000. Gina is self-employed too and has a mobile hairdressing business. She earned €5,000 profit in 2020. Their tax liability is as follows;

€45,00020%€9,000
Less Tax credits
Married€3,300
Earned Income CreditTom€1,500
Earned Income CreditGina€1,000
Net Income Tax liability€3,200


You will see in the above example that Gina is not entitled to the full Earned Income credit. Her credit is 20% of her profits. Her profits would have to be €7,500 in 2020 for her to get the full credit.

Company directors who own 15% or more of the company are known as proprietary directors. They shouldn't claim the PAYE credit but would qualify for the Earned Income Credit.

Be careful with the interaction of the PAYE credit and the Earned Income Credit. When you combine both credits the value cannot be more than the value of the PAYE credit in a year. Using the example above if Gina had employment and got €6,000, she would get a PAYE credit for that of €1,200. She wouldn't get a further €1,000 of Earned Income Credit for the trading profit. The max she would get is €450 as when you combine the two credits it comes to €1,650. For more information on this Click here

Local Property Tax

This is a complete pain for tax advisors. In the main, we are not linked to this tax and don't look after it for clients. We rely on our clients to keep their LPT returns and taxes up to date. In the Income Tax checklist we give to our clients we ask the question if their LPT returns and LPT payments are ok. We always get a yes for the answer. And in most cases, the LPT is correct. There are always one or two cases a year where a surcharge appears on the tax assessment. This results in pain for the taxpayer as his/her liability is greater than they expect. It is an awkward one for us, but we will help in any way we can to get it resolved. It is especially painful if the client is a proprietary director as the surcharge is more penal for them.

We had a case recently where Revenue applied a surcharge of €3,700 to one of our clients due to LPT issues. The client had their LPT records in order and was able to prove this, so we were able to get rid of the surcharge. In a case we had in 2018 the client was also hit with a surcharge. He had all his LPT payments up to date but hadn't filed an LPT return for a few years which he was unaware of. It was unfair in the sense that Revenue weren't out of pocket as he had made all the payments. Yet they refused to get rid of the surcharge despite our best efforts.

This is a 10% surcharge on your tax liability, and it doesn't only apply to Income Tax. It also applies to corporation tax and capital gains tax. Revenue will cap the amount of the surcharge to the actual LPT liability provided

  • the LPT generated surcharge is higher than the combined LPT liabilities outstanding
  • the person has filed the LPT return
  • the person has paid any outstanding LPT or enters a payment arrangement

In most cases, LPT liabilities are a few hundred euros each year. The havoc they can cause in time and money is not worth it. You need to be certain this is all looked after to avoid this hassle. And you won't get tax clearance if LPT is not right - For more information on this Click here

Home Renovation Incentive

This tax credit was brought in to boost the building trade and to give homeowners a tax break for works done. It started as a tax credit for homeowners to get some of the Vat back on construction activities. The incentive was then extended to landlords for rental properties. The qualifying expenditure had to be on repair, renovation or improvement works. The expenditure had to happen in the period from the 13th of October 2013 to 31 December 2018.

The type of work was liable to Vat at 13.5% and the lowest spend was €5,000 inclusive of Vat. The Vat in this amount is €595. The highest amount you could get tax relief on was Vat of €4,050. This was a spend of €34,050 inclusive of Vat. So, if you spent €40,000 your credit is €4,050. The homeowner and builder entered an agreement to input the details on ROS. Once the details were on ROS the homeowner could claim a credit over the following two tax years. So, if qualifying work was in 2017 the homeowner/taxpayer could claim the tax credit in 2018 and 2019. 50% of the credit would reduce the tax liability in each tax year. For self-assessed taxpayers, they would claim it on-line through ROS. Then they would include it in their tax returns for the relevant years.

Annette Curtin has a lovely home in Dunmore East. She hires a local builder Lino Richie to put an extension onto her house in 2015. The total cost is €30,000 inclusive of Vat. Lino agrees to enter the details onto ROS so that Annette can claim the credit.

Total costvat inclusive€30,000
Net of vat amount{€30,000/113.5] x 100€26,432
Vat amount/credit available€3,568
Tax credit 201650%€1,784
Tax credit 201850%€1,784


We took over a client for the 2019 tax year and we could see from ROS that there were HRI details for 2017. We were able to claim the tax credit of €2,050 for her in her 2019 return. We will go back and claim the other €2,050 by amending her 2018 return. For more information on this Click here

4 Year Look back

If you overpaid tax in 2016 because of under claimed tax credits or unused rate bands get moving. You have until the end of this month to apply for a refund. If you look at Annette above, she won’t be able to claim the HRI credit for 2016 in 2021. The basic rule is that you can go back 4 years so from the start of 2021 you will only be able to go back to 2017.

Tax law is very much in favour of Revenue in this respect. There are many cases taken to the Tax Appeals commissioners each year. These cases are looking to secure tax refunds for unclaimed tax credits. In all cases, the taxpayer loses because the law is very clear. You can only get tax relief for the previous 4 years. Revenue can go back as many years as they want if the return is not filed or there is an incorrect return.

This year we were able to secure a tax refund of over €16,000 for a client over 4 tax years 2016 to 2019. This was a combination of credits and reliefs

  • Homecarer credit [spouse not working and had young kids]
  • Medical insurance credit [company paid for this for his family]
  • Medical expenses
  • Employing a carer for parents

This is your money, so it is up to you to get it back. See here

Summary

You need to know that your tax return is correct. If Revenue come calling you are in a comfortable position of knowing that you don't owe them anything. This avoids the worry of extra tax, interest, and penalties. It is also vital for you to know that you haven't overpaid Revenue. If you are due money back, then go get it. The longer you wait the less you will receive.

"I don't like paying taxes, but I like sleeping at night"  Leonardo Vecchio

Need help with your taxes? Call Deirdre on 051396703 and she will point you in the right direction. Or Contact us and we will help you if we can



 

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