Let’s have a look at 5 Income Tax return Tips for 2022. We are now at peak Corporation Tax return filing time. On Monday the focus will switch to Income Tax returns for 2022. All with the view of keeping our clients tax compliant and Revenue happy.
Revenue want the Tax return to know how much you owe them. Getting the cash is a bonus. But once they know the amount, they’ll get that anyway! We’ll look at some Tips. More, so you don’t forget and leave money behind you or leave yourself exposed to paying Revenue more. A horrible thought.
- Electric Car
- Preliminary Tax
- Pension
- College Costs
- CGT exemption
Electric Car
Rusty Bouquet runs a great auctioneering business in Hicksville. Forward-thinking and fed up with high fuel prices, he’ll do his bit for the environment. 2022 is the year he’s going electric. He fancies the Volkswagen ID4 but at €60,000 it isn’t cheap. His eyes start to water when he sees the VAT cost of €10,000 and VRT of €4,000.
Rusty takes the leap of faith and buys the car in July. So well before his year-end of 31 December. He knows for Capital Allowances purposes the max write-off he’ll get is €24,000. As far as he’s aware that’s over 8 years so €3,000 per annum. At 52% he’ll save €1,560. Not huge, but better in his pocket.
For electric cars, you can get 100% capital allowances in Year 1. That’s brilliant as he won’t have to wait for 8 years and will help reduce his tax bill.
| Specified Limit | €24,000 |
| Tax saving Year 1 52% | €12,480 |
If there’s private use, say 25%, then the deduction would be 75% of €24,000, being €18,000.
The year 1 write-off applies whether he’s a sole trader or trading through a company. There’s a specific section in both Income & Corporation Tax returns to claim it.
Vat claim
And remember, as the car is a Category A car for reduced emissions, some VAT recovery is possible. Once the business use of the car is 60% or more then Rusty can get 20% of the VAT back.
| Vat cost | €10,000 |
| Vat recovery 20% | €2,000 |
This increases his potential year 1 saving to €14,480. Rusty is very excited to hear this news and can’t wait to tell the boys at the Tennis Club.
Preliminary Tax
Preliminary Tax is a payment on account for current year taxes. When you file your Income Tax return for 2022 Revenue expect you to
- Make a preliminary tax payment for 2023 and
- Pay the balance owing for 2022.
The rule is you pay 100% of the previous year’s liability or 90% of the current year’s liability. Jim Lowe is a company director and his final tax liability for 2022 is €5,000. But he already paid €4,500 preliminary tax for 2022 in November 2022. So, he only owes €500 for 2022.
In May this year Jim took a dividend from his company Ihavalot Ltd of €150,000 to revamp the house. Jim can meet his preliminary tax obligations by either paying.
- 100% of the prior year [2022] liability of €5,000 or
- 90% of the current year. Estimated €45,000 x 90% €40,500
Provided Jim makes the €5,000 payment he’ll have met his obligations, as he satisfied the 100% rule. But let’s assume he doesn’t pay any preliminary tax. He gets the hump and says Revenue can swing for it. A dangerous move as he’s exposing himself to interest.
Interest
Jim’s final bill for 2023 comes to €45,000 as predicted. He didn’t pay any Prelim. Revenue come along and slap an interest bill of 8%, €3,600, on him. Given that he didn’t pay prelim, the interest bill runs from 1 November 2023 to the date of payment. He pays on the 31st of October 2024. He can appeal to Revenue’s good nature, but they have him by the proverbials!
This would be a foolish move as he had the money to pay the much lower prelim amount. Just one to watch when there’s a large increase in income in the current tax year. The other side of the coin is if the source of income that created the tax liability isn’t there for the full year. Then the 90% rule could be the way to go.
Pension
Tax Bliss are putting together Rusty Bouquet’s Income Tax return for 2022. Mike is the manager there and likes helping Rusty as he appreciates the work and always pays his fee on time. Rusty’s profit is €100,000. With the electric car and a few other bits, his capital allowances are €25,000.
Rusty is 52 and pays €1,000 per month into his pension with Irish Life. Mike crunches the numbers and calculates that Rusty can put €22,500 into his pension.
| Trading Profit | €100,000 |
| Less Capital Allowances | €25,000 |
| Pensionable earnings | €75,000 |
| 30% of that | €22,500 |
| Amount already paid | €12,000 |
| Potential Extra | €10,500 |
Rusty’s tax liability for 2022 before making any extra pension payment is €14,000. He decides to make a top-up payment of €10,000 before the tax return filing deadline of the 31st of October. He’ll save tax on that at 40% and reduce his final liability to €10,000. As a result, there’s a double saving as the preliminary tax amount for 2023 will also come down to €10,000. The total outlay with pension is €30,000.
| Pension Payment | €10,000 |
| Tax liability 2022 | €10,000 |
| Prelim Tax 2023 [100% rule] | €10,000 |
The outlay with no pension is €28,000.
| Tax liability 2022 | €14,000 |
| Prelim Tax 2023 [100% rule] | €14,000 |
For €2,000 more he has made a €10,000 pension contribution. The downside of this option is the prelim tax payment for 2023 is lower at €10,000 compared to €14,000.
College Costs
Liam O’Neill is a good client of ours. He called in recently to go through his company accounts for 2022. We got chatting about his kids and he was saying last year was a killer with all the college costs. His young lad, Paul, was in college in Glasgow studying criminology. And his daughter Marie started at UCC studying Science.
The fees for Paul were £8,250 and Liam wasn’t aware that he could claim something for fees paid to a college in the UK. Especially now that they are not even in the EU anymore! Marie’s fees were €3,000 but Liam got a refund of €1,000. On top of that Liam paid €4,500 for student accommodation in Cork. We started digging and needed to get the
- Landlord’s name
- Landlord’s tax number
- Address of the property
- Date the tenancy commenced
- Marie’s PPS number
Let’s look at the tuition fees first.
| Fees paid for Paul £8,250/0.85 | €9,706 |
| Max allowed is | €7,000 |
| Add Marie’s fees of | €3,000 |
| Less part refund of fees | (€1,000) |
| Total | €9,000 |
| Deduct for annual claim | (€3,000) |
| Allowable amount | €6,000 |
| Tax relief @ 20% | €1,200 |
Rent Credit
The rent tax credit is at 20%. As such, the credit for Liam is €4,500 x 20% or €900. When adding the two credits Liam gets back €2,100. Better than a slap in the face with a wet fish!
2022 is the first year of the rent tax credit and you can get that if you
- rent your own home
- rent a home for work
- or for a child in college
The max tax credit is €500 for a single person or €1,000 for a jointly assessed couple.
Capital Gains Tax [CGT] Exemption
The CGT exemption relates to property acquired from 7 December 2011 to 31 December 2014. Property is land or buildings, and it also applies to property acquired in the UK or EEA country. An EEA country is all EU countries plus Norway, Iceland, and Liechtenstein.
With the increase in property prices in recent years investors are looking to sell and cash in. Provided you held the property for 7 years, later reduced to 4 years, then you would qualify for the relief. Say you held the property for 10 years. 7/10ths of the gain would get relief and you’d pay tax on 3/10ths.
Jim Lowe’s son Rob bought an apartment in Hard Rock Cove in Tramore in January 2013 for €50,000 including costs. Rob was living in Hollywood [California not Co. Down] at the time making a few movies. Rob rented Hard Rock for all the time that he owned it.
His US tax advisor Mr Todd Brady returned the income in Rob’s annual US tax return. Rob wants to buy a bigger pad in the Hollywood hills so decides to sell Hard Rock for €205,000 at the start of 2022.
CGT Computation
Costs of sale come to €5,000. The CGT computation will look like this
| Sales Proceeds | €205,000 |
| Less costs of sale | €5,000 |
| Net Proceeds | €200,000 |
| Less cost of purchase | €50,000 |
| Gain | €150,000 |
| CGT relief 7/9ths | €116,667 |
| Taxable Gain | €33,333 |
| Tax Payable | €11,000 |
Rob is so happy with the outcome. Until the day his Irish advisor, Reg, notices that Mr Lowe isn’t registered for Income Tax here. Thinking this odd, they explore further, and Rob has never done an Irish Tax return. Sure, why should he when he’s been in America for years?
To get the relief any income from the property must be subject to Income Tax or Corporation Tax here. Without the relief, the CGT liability jumps to €49,500. An extra €38,500. All is not lost as they can still return the income. Reg just got landed with another 9 Income Tax returns on top of the 150 already on his list. They decide to complete Rob’s 2022 return and claim the CGT relief after the tax tidy up for the prior years.
Tax is just one of the areas we help our clients with. To find out more, Start here
