The team here is very busy getting accounts and tax returns sorted out for clients. We are smack bang in the middle of tax return filing season. In our last blog we highlighted some of the “beasties” to be aware of when filing your 2020 Tax return. In case you missed it click here. This week and next we are going to look at 10 tax tips when filing your Income Tax return. This week we will look at
- Property & land sales – CGT relief
- Pension payments – backdate
- Earned Income Credit
- Medical Insurance Credit
- Local Property Tax
Capital Gains Tax Relief
Did you buy property or land in the period from the 7th of December 2011 and the 31st of December 2014? If so, and you sold that after the 1st of January 2018, then you could be exempt from paying CGT on the gain. Let’s say you owned the property for more than 4 and less than 7 years, then the entire gain is exempt. If you own the property for more than 7 years, then the first 7 years are exempt.
Tony Tyrell bought a rental property in Kilkenny for €100,000 in March 2012. He incurred legal fees and stamp duty costs of €3,000 to buy it. He sold the property for €200,000 in March 2020. Also, he incurred legal, auctioneering, and accounting fees of €5,000 on sale. His CGT liability is as follows
| Sales Proceeds | €200,000 | |
| Less Costs of Sale | €5,000 | |
| Net Proceeds | €195,000 | |
| Less Purchase Cost | €100,000 | |
| Less incidental costs of purchase | €3,000 | |
| Gain | €92,000 | |
| Exempt portion | 7/8ths | €80,500 |
| Chargeable Gain | €11,500 | |
| Less Personal exemption | €1,270 | |
| Taxable Gain | €10,230 | |
| Tax payable | 33% | €3,376 |
Only for this relief, Tony’s CGT bill would be €29,941. For more information on this click here
Pension Payments – Backdate
Tax relief on pensions is attractive especially for high-rate taxpayers who pay tax at 40%. Often when it comes to pensions, we are more interested in tax relief than saving for retirement. If we make personal pension contributions, we need to make sure we claim them all. So, my suggestion would be to
- Look at the pension payments you already made. Did you get tax relief on all the payments?
- What payments did you make in 2020? Did you pay every month, or did you stop them for a few months?
- What payments did you make in 2021 that you can backdate into 2020?
Be careful on this one. You don’t want to backdate payments into 2020 and get tax relief at 20% if you are paying 40% tax in 2021. The amount you can get tax relief on is based on your age and the taxable profit from your business. There is an earnings cap of €115,000 for self-employed individuals. So, if your taxable profit was €150,000 the cap would kick in. The older you get the more you can put in.
| Under 30 | 15% | |
| 30 to 39 | 20% | |
| 40 to 49 | 25% | |
| 50 to 54 | 30% | |
| 55 to 59 | 35% | |
| 60 + | 40% |
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If you hit 50 in the 2020 tax year, then you go up to the 30% of profits figure.
Mary Darcy runs a great dental practice and had profits of €130,000 in 2020. She pays €1000 per month into a pension with Irish Life. She turned 40 on the 1st of December 2020. The amount she can contribute to a pension for 2020 is
| Profits | €130,000 | |
| Earnings cap applies | €115,000 | |
| % of profits [Mary was 40 in 2020] | 25% | €28,750 |
| Amount already paid in 2020 | €12,000 | |
| Scope to get additional tax relief on | €16,750 | |
| Tax relief if Mary pays the extra pension | 40% | €6,700 |
You will see that Mary can pay up to €16,750 as a further pension contribution. If she pays that before the tax return filing date and claims it in her tax return, she will get the tax relief. She can reduce her final tax liability for 2020. If she does another benefit is that her preliminary tax payment for 2021 can also reduce by €6,700. For more information see here
Earned Income Credit
If you are self-employed or an owner-director of a company [own 15% or more] then you don’t get the PAYE credit of €1,650 per annum. But you can get the Earned Income Credit which is now €1,650. For 2022 both credits will increase by €50. In 2019 and prior years the earned income credit was less than the PAYE credit. From memory, it started off at €750. The most you can get between the two credits is €1,650. Many self-employed people received the PUP in 2020. This is a payment from the Department of Social Protection, and you can get a PAYE credit on that income. If your income is low the credit is capped at 20% of your earnings
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John Jones has a flower shop which he closed for 3 months of last year due to Covid. During that time, he got 13 PUP payments of €350 which is a total of €4,550. He had a small profit from the shop last year of €3,000. His credits for both incomes are
| Earned Income Credit – €3,000 | 20% | €600 |
| PAYE Credit – €4,550 | 20% | €910 |
| Total Credits | €1,510 |
To get the full Earned Income Credit your taxable profit must be €8,250 or above. If you multiply €8,250 by 20% it gives you the full credit. The same rule applies to PAYE income.
Spouses of owner directors, earning a salary from the company, are not entitled to the PAYE credit. They would get Earned Income Credit. The key message here is that once you get €1,650 between the two credits you cannot get anymore. For more information see here
Medical Insurance Credit
This tax credit is for employees and company directors. The company pays the premium and the employee is liable to benefit in kind [BIK] on the gross premium. The maximum tax credit for an adult is €200 and it is €100 for a child. It’s not unusual for the employer to pay the premium for the employee and their family. Once the gross adult premium is over €1000 and the gross child premium is more than €500 you get the full tax credit. If not, the credit is 20% of the gross premium
Tom Jones owns Old Crooners Ltd. The company pays medical insurance for Tom, his wife Vanessa, and their two adult children. Bella is the oldest daughter at 25 and Ben is the youngest at 14. The premiums from 1 January to 31 December 2020 are as follows.
| Gross Premium | Tax Credit | Net Premium |
| Tom €1500 | €200 | €1300 |
| Vanessa €1500 | €200 | €1300 |
| Bella €1250 | €200 | €1050 |
| Ben €400 | €80 | €320 |
The total gross premiums come to €4,650 and Tom pays BIK on that figure. When Tom’s tax advisor completes his 2020 Tax return, he will claim a tax credit for €680. Sometimes we see that this credit is on the tax credit certificates of our clients. But often the credit is only for the employee and not the family. Be careful if the medical insurance is only in place for part of the year as there is a time apportionment element. For more information click here
Local Property Tax – LPT
For us, this tax is a pain in the face! We ask our clients on our tax checklist if the returns and payments are up to date. There is a section on that tax return to declare that no surcharge applies because you have your LPT in order. When you sign your tax return you are confirming to Revenue you don’t have any LPT issues.
We submit client’s returns on that basis and when we check the assessments, we see that in a few cases there is a problem. How do we know there is a problem? Revenue applies a 10% surcharge to the tax liability, so you owe more than we or you thought. In most cases we are not the tax agent for LPT, so we have no way of checking if the client is compliant or not. Hence the question on the checklist. Revenue applies the surcharge when
- the LPT return that was due wasn’t filed and an Income Tax, Corporation Tax, or CGT return is filed
- there are outstanding LPT liabilities at the date of filing the IT, CT, or CGT return
- any LPT due is not getting paid under an agreed payment arrangement
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Fred is Clive Thomas’ tax advisor, and he files Clive’s tax return on time. Clive has a tax liability of €20,000. When Fred reviews the assessment, he sees that Clive has a total liability is €20,700. Revenue have applied a surcharge of €700. They capped the surcharge as 10% of €20,000 was higher than the combined LPT liabilities that Clive has. The killer for Clive is that he will have to pay both the surcharge of €700 and the outstanding LPT liabilities. What should have cost him €700 is now going to cost him double that amount. For more information see here
Summary
The above is to give you an idea of some tips and traps when it comes to your Income Tax and Capital Gains Tax returns. We always stress the importance of getting your tax advisor to file your return. The reason is that while you think “there’s nothing in it” believe me when I say there is. You are paying your advisor to make sure it is right and that you are not paying any more than you should. Your advisor is there to protect you and not take silly risks that can come back to haunt you. Save yourself time and stress. See you next week.
Interested in talking to us. Call Deirdre on 051 396703 or start here. Tell us about you and your business and we will see if we can help.
