It’s a taxing matter, so save where you can
No big tax cuts expected in Budget 2016, but don’t delay in slashing your own tax bill.
For the past few months, the Government and various think-tanks have been playing down expectations for tax cuts that might form part of the next Budget in October.
It’s been known since April that Finance Minister Michael Noonan will have €1.5bn extra to play with, thanks to better-than-expected exchequer returns, though think-tanks NERI, the Irish Fiscal Advisory Council and ESRI have all said they believe there is no scope for tax cuts.
But what scope is there for achieving tax cuts of your own by claiming all the credits and reliefs you are entitled to? We asked some tax experts for their top tips for getting a tax refund.
There are millions of unclaimed tax refunds every year, according to Cathal Maxwell of Paylesstax.ie. “Why? Because people are not aware of what can be claimed.”
Barry Flanagan of Taxback.com says the average PAYE refund his company processes for its customers is €880. “Keep doctor’s receipts, tuition receipts and correspondence from Revenue – all of these will make the tax reclaim process so much easier,” he says.
An analysis of Taxback.com’s customer records shows more men (58pc) claimed PAYE refunds than women last year, while those aged 21 to 40 accounted for a vast majority of refunds (77pc).
A frequent repeated piece of advice from all our experts is not to hang around, because you can claim back tax refunds for the last four years, which right now means 2011, 2012, 2013 and 2014.
As Gerry Hiney of Park Financial in Dublin says: “If you are due a tax refund, file your tax return early, as this refund could provide you with a much-needed case injection in early 2015.”
There is expectation that Budget 2016 will address the inheritance tax ‘trap’ caused by the recovery in property values against the reduction in the tax-free threshold per person from €434,000 in 2009 to €225,000 today. This threshold applies to children who inherit from parents.
Parents can provide houses for children in such a way as to avoid making them liable to the 33pc tax on the benefit. The main condition is that the child must have lived in the property for at least three years and not have an interest in any other dwelling house.
“It’s very important relief for avoiding inhe
ritance tax, and must be planned in advance,” says Mr Maxwell.
Parents can gift €6,000 per annum tax-free to children, which equals an annual tax saving of €1,980; €3,000 per year can also be given free of tax to grandchildren. “This is a very good way to reduce the value of your estate and save on inheritance tax,” says Mr Maxwell.
There are also tax-efficient ways for children to help out parents financially. If the children are paying tax at the top rate, they can use deeds of covenant to transfer income to retired parents. Depending on the circumstances, parents could pay no tax on this income, while their children get 40pc tax relief on the payments.
For example, if children enter a deed of covenant to pay parents €10,000 per annum to boost their retirement income, parents are not taxed on this income and it will cost the children only €6,000 per year, says Mr Maxwell.
A parent can also transfer a site they own to a child to allow them to build a house to live in and be exempt from capital gains tax once certain conditions are met, according to Mr Hiney. “This relief may be clawed back and charged on the child, in certain circumstances,” he says.
Don’t forget the Home Renovation Scheme. This scheme, which is due to run out in December (unless extended in Budget 2016), allows a tax credit of 13.5pc on certain costs of repair, renovation or improvement work carried out on a principal private residence.
“The building contractor must be VAT- registered and tax-compliant in order to carry out the work, so make sure that you engage someone who meets the criteria,” says Mr Hiney.
You will also have to have paid the Local Property Tax.
Medical expenses and health insurance
Tax relief for medical expenses not reimbursed by health insurance is easily the most popular relief to be claimed, but there are items that people may not be aware of, says Mr Flanagan.
“For example, if you are coeliac or diabetic, you may be able to claim tax relief on the costs of buying special foods, and if you attended a physiotherapist and have a letter from your doctor saying that the treatment was necessary, you may be able to claim tax relief on the fees charged,” he says.
If you have a health insurance plan that covers routine medical expenses, you should always claim from your insurer first, rather than the Revenue, advises Dermot Goode of Totalhealthcover.ie.
“You are then entitled to claim 20pc tax relief on most everyday medical expenses not covered by your health insurance,” he says.
Furthermore, if you are under-insured on your health insurance and have to pay a hospital excess or a shortfall for certain maternity or orthopaedic treatments, these costs can also be included in your annual claim, says Mr Goode.
“Shortfalls on maternity claims can often exceed €3,000, and similar shortfalls can apply to hip, knee and shoulder replacement procedures. By claiming your tax refund, this could be worth a further €600 in your pocket,” he says.
Investments and assets
Married couples can reduce the impact of some levies by splitting their income, such as by dividing investment or rental income. If one spouse has low income, this may avoid or reduce income tax, PRSI and the USC, says Mr Maxwell.
“So if spouse A has income of €60,000 per annum and rental income profit of €8,000 per annum and spouse B has no income, you could save €2,000 per year by transferring the rental property to spouse B, without incurring capital gains tax or gift tax,” he says.
If you have made a chargeable gain on an investment last year, says Mr Hiney, you should consider selling assets that have declined in value, such as shares, before the year-end to crystallise a capital loss, which could then be offset against this gain.
You could also consider gifting assets that are still undervalued to family members now or in the near future to avail of the low valuations, thereby reducing the CGT and CAT liabilities.
Thousands of Irish investors do not reclaim the withholding tax applied to their overseas dividends, according to Mr Flanagan.
“Statutory withholding tax rates range from between 10pc and 35pc, depending on the country, but thanks to tax treaties the excess tax paid on dividends can be reclaimed,” he says.
The potential percentage that can be reclaimed also varies. If you have investments in France, you could be entitled to a refund of 15pc of the dividend withholding tax (DWT) that you have paid, while in Switzerland this rate goes up to 20pc.
So if you received a dividend of €1,000 from shares in a Swiss company that were subject to 35pc DWT, the net dividend paid to you would be €650, but you would be entitled to a refund of €200 under the Ireland-Switzerland double tax treaty.
“Many investors are put off by the fact that the rules for filing tax reclaims can be complicated, and the paperwork required can be difficult to understand – not to mention in a different language,” said Mr Flanagan.
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