Thankfully the tax system offers some favourable tax advantages to another group within Irish society and that is to the over 65’s. There is no likelihood of me becoming a famer as I’d probably die of exhaustion but I hope there is a strong possibility of reaching 65. My wife constantly tells me that I am not that far away but it still is more than 20 years dear!
In this blog I just want to look at some of the Income Tax advantages of reaching this milestone and I will follow up next week with a look at other relevant taxes to include Capital Gains Tax and Gift/Inheritance Tax.
Income Tax exemption
For a person who reaches 65 or is over 65 in a tax year then they will not pay any Income Tax if their total income is less than €18000. For a married couple/civil partnership this total income threshold increases to €36000. For a married couple it is the age of the oldest spouse/civil partner that is relevant. If one spouse is 64 and the other is 66 then the exemption limits would apply as one spouse was over 65. Total income is your income from all sources and includes trading profits, rental profit, deposit interest, dividends and employment and pension earnings. Often we would see individuals who have a small pension from a previous employment and a state pension and, once the total of the two was less than €18000, then they wouldn’t pay any Income Tax on that. We would also see older married couples who would have a small income but would have entitlement to a state pension each or one state pension with an increase for a qualified adult. The combined state pensions would be in the region of €22000 and once their other income, from other sources, was less than €14000 then they would not be liable to any Income Tax. They may be liable to some PRSI and USC but, as we will see, this could be quite minimal. The exemption limits are increased if you have qualifying children and there are various definitions around that.
The fact that you could be exempt from Income Tax has relevance for certain other earnings. For example, if DIRT was deducted from deposit interest earned or Dividend Withholding Tax deducted from dividend income, you would be entitled to get a refund of these taxes. It is also important to know that you can contact your financial institution to confirm, by means of completing a form DE1, that your income would be below the income tax exemption limits and that they shouldn’t deduct DIRT in the first place. Although interest rates have fallen off a cliff if you don’t have to pay 41% Dirt tax or you can get a refund of it, then good for you. It is possible to review your taxes over a 4 year period from 2013 to 2016 so if you had substantial deposit interest or dividend income in these years and not much other income it could be worth getting your figures looked at. If your income was just over the €18000 or €36000 figures then there is still some potential relief. We were able to get back over €6,000 in DIRT for a new client by completing a review for a 4 year period and submitting returns.
Age Tax credit
If you are single and reach or are over 65 in a tax year you are entitled to an age tax credit of €245. If you are married, and the oldest spouse or civil partner is 65 or over in a tax year, then the tax credit doubles to €490.
Blind Tax credit
If you or your spouse or civil partner suffers from a visual impairment at any stage during the tax year then you could get a blind tax credit of €1650 for one person or €3300 for both spouses
To qualify for the tax credit you or your spouse or civil partner must have impaired vision. The level of impaired vision is set out in tax guidelines and your optician or consultant would be aware of the finer detail.
This condition must be certified by an eye specialist to the extent of the loss of sight and whether the condition is temporary or permanent.
Deed of covenant
Payback time! If you are over 65 and have a low income you may rely on some generosity from your children to ensure you have a better standard of living. If your child, or some other person, gives you a sum of money each year, then this arrangement can be formalised through a deed of covenant. For example Jane gives her 70 year old mother €4000 each year and it would be her intention to continue doing this for the coming years, then they should enter into a deed of covenant. This is a document that Jane signs where she commits to giving her mother the same amount of money for the next 7 years. Jane must deduct 20% tax from the gross payment and pay that to Revenue. In this example the gross payment is €5000 so Jane deducts 20% being €1000 and pays that to Revenue and pays the balance to her mum. Jane gets a tax deduction for the gross amount of €5000 at her top tax rate (assume 40%) and her Mum is liable to tax on the gross payment of €5000. If her mum’s income is low [perhaps she is only on a state pension] so that her combined income is less than €18000 then her mum could get a tax refund of the €1000 that Jane paid over to Revenue for her. This works very well when the payer is paying tax at the high rate and the recipient is paying little or no tax or paying tax at the 20% rate. The various covenant forms are on the Revenue website and your tax adviser would be able to help you with completing these.
This is paid throughout your working life on your salary, trading profits and now also on your un-earned income such as rents, dividends and deposit interest. The PRSI charge is 4% of your Income and the payment goes towards your state benefits, the most common being state pension, maternity benefit and widow’s pension. You stop paying PRSI at the age of 66. Therefore once you are over 66 you will no longer be liable to PRSI. These are the rules as currently stand but as the state pension age is being extended out to 68 then it is probably likely that we will have to keep paying PRSI to that date.
Stay tuned for next week’s blog which will continue along the same theme and we will take a look at USC for over 65’s and other tax issues to include Retirement Relief, transfer of a site, dwelling house exemption and gifts.