Thankfully the Income Tax return deadline has now passed and as all our hard earned cash is winging it's way to Minister Noonan we think it's a good time to mull over some tax planning opportunities and some tax saving tips before the end of 2016 so we can be a little more financially savvy than we were in 2015.
1. Employment Investment Incentive Scheme [EIIS]
You will see the adverts in the Sunday papers from now until the end of the year offering investment opportunities from companies that are looking to secure funding under this scheme. Stockbrokers such as Davy, Goodbody and some large accountancy practices such as BDO raise funds that will be invested across a panel of companies. These are called designated funds. There are other offerings from single companies. Basically early stage, but growing, companies can raise money from investors for their businesses to fund expansion and hopefully future growth and profitability. Investment amounts usually range from €5000 to €150000 and once the investment is in a qualifying company that has approval from Revenue to raise funds in this manner, the investor can benefit from tax relief at their higher tax rate. The tax relief is given in two stages. Firstly in the year of investment the investor can get tax on 75% of the amount invested and the balance of 25%can be claimed in the fourth year after investment. For example if an investor subscribes €20000 for shares in an EIIS company before 31 December 2016 he/she would get tax relief on €15000 in 2016 and the balance of tax relief €5000 would be claimed in 2020. The balance of relief is only due once the company has met certain conditions regarding increasing employee numbers and wages. For someone in the higher tax bracket of 40% this equates to a tax saving of €6000 in 2016 and €2000 in 2020. Therefore the net cost of the investment is €12000 once all tax relief is obtained. There are various conditions in terms of a holding period for the shares etc that an investor should take advice on but typically the company will buy back the investors' shares after a 4 year period, or longer, for an agreed price. Any gain on the amount paid for the shares would be liable to Capital Gains Tax. For company directors that own their own company and have spare cash this could be a good way of using company money to invest. As with any investment there is risk involved and the investor needs to be happy that the risk level matches what they are willing to take on despite the attractive tax relief.
2. Capital Gains Tax Losses – Shares and Property
Have you made a gain in 2016 on which you will pay Capital Gains Tax at 33%. The Minister will get 1/3 of your gain despite having taken none of the risk. This is quite a large chunk especially when it used to be 20%. Do you have other assets such as shares or property that cost more than its current value? Probably the most common large decline in value was seen in certain shares and most notably bank shares. This is a very sore subject from the writer's viewpoint! If you sell those shares before the end of the current year and realise a loss then that loss can be offset against a gain on the sale of other assets. Say you sold Glanbia shares at a profit of €15000 and after deducting your personal CGT exemption of €1270 your CGT bill is €4531. If you sold 1000 AIB shares that cost you €12000 and are now worth €50 your loss is €11950. That loss can be used against the gain to leave you with a net gain of €3050 and after deducting the personal exemption of €1270 your CGT bill has fallen to €587 which is a saving of €3944. The key here is that the loss is crystallised in the same or prior year before the gain is realised. It is possible to carry losses forward to future tax years or use losses realised in the same tax year but it isn't possible to carry losses back, except in cases of death which we hope is a long time away for our readers! A key point here is that losses should be captured each year when doing your Income Tax return and these losses will then be on Revenue record when needed
3. Small Gift Exemption
This probably only applies to the quite wealthy, a category we are all trying to get into. If you have excess cash that is not needed but you have family members who need some funds for whatever reason, house deposit or wedding etc then you can give them up to €3000 per annum which will have no impact on any future larger gifts or inheritances that you may have planned for them. The new parent child inheritance/gift tax lifetime threshold stands at €310000. For example if you made a cash gift of €500000 to your child and, ignoring the small gift exemption, the gift tax liability would be €190000 X 33% which is €62700. By giving €3000 per annum this doesn't eat into the lifetime ceiling. If two parents are alive the €3000 can become €6000 ie €3000 from each parent and if the child is married it can increase to €12000 which is €3000 from each parent to their child and €3000 from each to the son/daughter in law. Hope our parents are reading this.
4. Carrying on a business
For those of us carrying on a business we can do certain things before our year end so that we can reduce our tax bills for this time next year. Most business year ends are 31 December whether you are trading through a company, a partnership or are a sole trader. If profits are going to be higher, then you could think of incurring expenditure before year end that you were planning to do anyway next year. Your premises may need painting or other repairs works. Why not get these started before the year end, so you will have incurred some, if not all, of the cost and they will be an allowable deduction against profits. Also you could be looking at buying a new machine on which you should get Capital allowances. If you need it and intend buying it anyway, best to get it done before your accounting year end. Once the machine has been purchased and is in use for the trade before the year end then you will be entitled to capital allowances. Be aware if there are any additional allowances available for it such as 100% write off with certain energy efficient equipment.You may also benefit from additional allowances if you sell an asset that has little or no value so just speak with your accountants before doing anything.
5. Unclaimed tax credits
A lot of us in this profession have seen a huge amount of tax returns and computations in the last few months and there are always a few common issues that arise that people need to be aware of. They may have paid and still could be paying too much tax because they are not getting all their tax credits. A couple came into us recently where the husband had been working for the last 25 years or so and his wife has been at home looking after children. When we looked at his P60 we could see that he wasn't getting the home carers tax credit of €810 which is €1000 in 2016 and has gone to €1100 for 2017. There are other common ones such as medical expenses which are available at 20%. This would include prescriptions, consultants, and non-routine dental treatment but can be worth a few bob especially if you have gone through IVF or had a consultant for the births of your children. A €3000 spend would result in a tax saving of €600. Another credit that we see a bit of is the medical insurance tax credit where the employer pays for the employee and, in some instances, also pays for other family members. The maximum credit is €200 per adult once the premium is in excess of €1000 and the max per child is €100 when the premium is over €500. Often some of the tax credits will be given on the tax credit certs but sometimes the amount given is less than it should be. You may also be entitled to certain flat rate expenses if you are in a specific job. For lecturers this is €518 per annum and is €733 for nurses who supply and launder their own uniform.It is possible to go back for 4 years and claim any unclaimed expenses and tax credits but just be sure you get the professional help as you don't want to end up owing Revenue money for some other reason. This is especially sore when you think the riches are coming in your direction. It is possible to go back 4 years so you will be able to go back to 2012 up to the end of this year but from the start of 2017 you will only be able to back as far as 2013.