Taxation RoI

Revision 1

Topic: Tax Credits/ Reliefs & Allowances

Ciarán Armstrong 28th April 2020

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Contents: Narrative questions

IT computation summary

Tax credits Single Person Child Carer

Employee/PAYE & Earned Income Widowed

College Fees Medical Expenses

Home renovation Incentive scheme

Home Carer (Revision session 2)

Reliefs and Allowances

Employing a carer PHI

Charitable donations Business Start-up Covenants

Pension Contributions Exempt/ Marginal relief

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Narrative questions

1. Read question carefully

2. Tailor your answer to number of marks available.

3. Give a basic explanation if relevant.

4. Quote any amounts involved (TRM).

5. Try to make points using individual sentences.

6. Do not use bullet points or long paragraphs.

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Income Tax computation INCOME

Sch D case I/II Income from Trade/Profession

less Pension Contributions Max calculation

Sch D case III Untaxed & Foreign Income Tax the income received

Sch D case IV Taxed Interest & Other DIRT

Sch D case V Irish Rental Income Amount earned - expenses

Schedule E Income from Employment Salary/bonus/pension/expenses

BIK – car 30% * OMV: bus mileage

BIK – pref. loan 4% / 13.5%

BIK - expense Amount of expense

less Pension Contributions Max calculation

Schedule F Irish dividend income Gross received/DWT

GROSS INCOME

less Charges Allowable Covenants

TOTAL INCOME (STATUTORY INCOME)

less Allowances Employing a carer €75,000 max; no tax credits PHI Max 10%

TAXABLE INCOME

Calculation of Income Tax

€35,300/€39,300/€44,300 20%

Spouse’s income (max €26,300) 20%

Deposit interest 35%

Balance 40%

Non-refundable Tax Credits

Personal credit €1,650/€3,300

Employee /PAYE Lower of €1,650 or 20% of sch E income

Earned income Lower of €1,350 or 20% of earned income

DIRT Gross interest x 35% or net x 100/65

Single parent CCC €1,650 and higher SRCOP

Widowed €2,190

Additional Widowed parent Dependent children, year of bereavement

Age credit Aged 65 or over: married €490, single €245

Blind person’s credit Individual credit of €1,650

Home carer Income limit €7,200: marginal relief to €10,200

Rent No longer available

3rd level tuition fees See tax reference material (p162)

Incapacitated child €3,300

Dependent relative €70 (income limit €14,753)

Medical expenses Routine dental and optical not allowed

HRI scheme Only 13.5% VAT rate: over two years: p83

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Refundable Tax Credits

(p84/85)

PAYE paid Will be given in question

DWT 20% of gross or net amount x 100/80

DIRT (over 65 only) Gross interest x 35% or net x 100/65

RCT/PSWT Be aware of existence of both

IT deducted (covenants etc) 20%

TAX CREDITS

Single Person Child Carer Qualifying criteria for claiming:

Must be the parent or responsible for care & maintenance of the child. Single and not jointly assessed, married/civil partner, cohabiting, etc.

Can claim only one credit in respect of all qualifying children. Qualifying Child:

A child who is under 18.

Over 18 and in full time education/undergoing training. Permanently incapacitated before age of 21 or in full time education.

Surrender to Second Claimant (SC):

SC must meet the qualifying criteria. Child must reside with SC for at least 100 days in the tax year.

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Employee (PAYE) and Earned Income tax credits

Employee (PAYE) tax credit

Only applies to Schedule E income.

Requires minimum of €8,250 total Schedule E income to receive full credit

of €1,650.

If less than €8,250, given as 20% of Schedule E income.

This figure will include all Schedule E income, including BIK and deduction

of Pension Contributions.

Unused element cannot be transferred to a spouse.

Certain employees cannot avail of the tax credit:

Proprietary Director (15%)

Spouse/Partner of a Proprietary Director when employed by the same

company.

Spouse/Partner of a self-employed individual when employed by that

individual

Child will qualify if employed full-time and earning more than €4,572.

Earned Income tax credit

Can be claimed on earned income from trade, profession, or employment

income.

Maximum credit is €1,350 if qualifying income is at least €6,750

If less than €6,750, given as 20% of earned income.

If an individual is entitled to claim both credits the combined amount is

restricted to a maximum of €1,650.

Medical Expenses

Most Medical expenses. Non-routine dental costs.

Non-routine ophthalmic costs.

Any reimbursed amounts (medical insurance, local or health authority, compensation) must be first deducted.

Nursing home expenses are allowable at 40%.

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IT Computation: Stephen

Stephen is 19 and single, he has income in 2019 from farm services of €2,500,

schedule E of €7,000 (PAYE deducted €200), and received deposit interest net

from his bank of €5,200

€ €

Income:

Case I/II 2,500

Schedule E 7,000

Case IV (€5,200*100/65) 8,000

17,500

Taxed as follows:

€9,500 @ 20% 1,900

€8,000 @ 35% 2,800

4,700

non-ref TCs:

Single 1,650

Employee/PAYE 1,400

Earned income 250

DIRT 2,800

6,100

0

Refundable Tax Credits:

PAYE deducted 200

Tax payable/(refundable) (200)

1. Employee TC (PAYE) restricted to €7,000 @ 20% = €1,400

2. Earned income TC restricted to

a. Case I/II income

b. €2,500 @ 20% = €500

3. (1) and (2) combined cannot exceed €1,650

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Widowed Widowed without Qualifying children

COP: €35,300 Tax credit*: €2,190

Widowed (pre-2014) with Qualifying children COP: €39,300

Tax credits*: €1,650 + €1,650 (SPCC)

Widowed (2014 - 2018) with Qualifying children COP: €39,300 Tax credits*: €1,650 + €1,650 (SPCC) +€Year of Bereavement.

*other credits will depend on specific circumstances

Examples:

Ann (43) widowed in 2015: 2 dependent children: PAYE income €40,000

Taxation: € € €39,300 @ 20% 7,860

€700 @ 40% 280

8,140

Tax Credits: Single 1,650 SPCC 1,650

Y of B 2015 2,250 Employee/PAYE 1,650

7,200

John (56) widowed in 2018: two dependent children: case I €40,000

Taxation: € €

€39,300 @ 20% 7,860 €700 @ 40% 280

8,140 Tax Credits:

Single 1,650 SPCC 1,650 Y of B 2018 3,600

Earned income 1,350

8,250

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Lorna (56) widowed in 2012: 3 dependent children: case I €24,000, case III €12,000, case IV €2,600 (net).

Taxation: € € €39,300 @ 20% 7,860

€700 @ 40% 280

8,140

Tax Credits: Single 1,650 SPCC 1,650

DIRT 1,600 Earned income 1,350

6,250

Mary (61) widowed in 2017: no children: case I €30,000, PAYE income €6,000

Taxation: € €

€35,300 @ 20% 7,060 €700 @ 40% 280

7,340 Tax Credits:

Widowed 2,190 Employee/PAYE 1,650

3,840

Joe (67) widowed in 2015: one incapacitated child: PAYE income €40,000

Taxation: € €

€39,300 @ 20% 7,860 €700 @ 40% 280

8,140 Tax Credits:

Single 1,650 SPCC 1,650

Age credit 245 Y of B 2015 2,250 Employee/PAYE 1,650

Incapacitated Child 3,300

10,745

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College Fees

Tax credit is granted for qualifying fees for third level courses provided by ‘approved colleges’. Maximum amount for each qualifying course is €7,000.

The first €3,000 (full-time courses) or €1,500 (part-time courses) is disregarded for each claim.

Credit is allowed at 20% of qualifying fees. Only tuition fees and student contributions qualify. Grants, scholarships must be deducted.

The relief is available for fees paid by the taxpayer on behalf of any individual.

Home Renovation Incentive Scheme

The HRI scheme provides tax relief by way of an income tax credit at 13.5% of qualifying expenditure on: Repair, Renovation or

Improvement works. These works must be carried out by qualifying Contractors.

The amount of HRI tax credit depends on the amount spent on qualifying works. The minimum is €4,405 (before VAT) to qualify for the tax credit.

There is no limit to the amount spent but an individual can only claim the tax credit on expenditure up to €30,000 (before VAT). The lowest tax credit is €595 (€4,405 at 13.5%) and the highest tax credit is €4,050 (€30,000 at

13.5%)

Qualifying expenditure must be incurred between 25th October 2013 and 31st December 2018. HRI tax credit is included as a tax credit over two years, starting the year

after the work is carried out and paid for. For PAYE taxpayers, the tax credit will be spread evenly throughout the 2 years.

The VAT rate on works carried out must be 13.5%. Carpets, furniture, white goods (such as fridges, dishwashers) and services (such as architects’ fees)

with a VAT rate of 23% do not qualify. Materials purchased by the taxpayer such as paint, tiles etc, cannot be included when working out the qualifying

expenditure.

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If the works are the subject of an insurance claim, the qualifying expenditure is reduced by the amount due or received and there are also reductions for grants received.

Reliefs and Other Allowances Employing a Carer

The incapacitated individual must be the taxpayer, their spouse or a relative of the taxpayer/spouse.

Claim is amount incurred up to maximum of €75,000

If borne by more than one taxpayer, apportion the allowance in ratio of expenses incurred.

Taxpayer cannot alco claim Dependant Relative Credit or Incapacitated Child Credit in respect of the same person.

Permanent Health Insurance

Premiums paid can be claimed to a maximum of 10% of total income.

Income payable from a PHI policy is taxable under Schedule E.

Charitable Donations Must be to an approved charity.

Minimum €250: Maximum €1m.

Tax relief is granted to the charity at 31%.

Restricted to 10% of an individual’s income if connected to the charity.

Start your own Business Exemption New business must be unincorporated – sole trader or partnership.

For start-ups between 25th October 2013 and 31st December 2018.

Individual must have been unemployed for at least 12 months.

Exemption allows relief from Income Tax up to €40,000 per annum for two

years.

Exemption does not apply to PRSI & USC.

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Pension Contributions see separate handout

Covenants

A covenant is a legal agreement under which a person (the covenantor) undertakes to make payments of a specified amount to another person (the

covenantee) for a period which exceeds six years.

Conditions:

Available for covenants payable to 1. Permanently incapacitated individuals (minor/adult), without restriction,

but no tax deduction/relief is available for covenant payments paid in favour of the covenantor’s own child.

2. Persons over 65 years, subject to a maximum deduction of 5% of the

covenantor’s total income

Tax treatment: Covenantor

(i) The gross covenant payment is allowed as a deduction from the

covenantor’s gross income

(ii) The covenantor must deduct standard rate tax from the payment made to the covenantee and include the tax so deducted as tax payable in

their income tax computation Example: Ann covenants to pay her incapacitated sister Rosa €5,000 annually.

(i) Ann will receive a deduction of €5,000 in her tax computation

(ii) She will give her sister €5,000 - €1,000 (20%) = €4,000

(iii) €1,000 should be included as tax payable in Ann’s tax return

Tax treatment: Covenantee

(i) Individual receiving the payment will gross up the amount and include it in their tax return. In the example above Rosa will show Schedule

D case IV income of €5,000 (€4,000 received * 100/80).

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(ii) Rosa is entitled to a refundable tax credit of €1,000 for the taxation deducted by her sister.

Marginal Relief

In each of the following X and Y are married with no dependent children, X is 67 and Y is 65. They have no refundable tax credits.

X Y 1 Sch. E: €18,000 Sch. E: €21,000 2 Sch. E: €39,000 €0

3 case I: €39,000 Sch. E: €7,000

Q1 Maximum tax payable 3,000 @ 40% 1,200 Income:

39,000 @ 20% 7,800 Non-ref tax credits:

Married 3,300 Employee/PAYE 3,300 Age credit 490 7,090

Tax payable 710 Tax payable is lower than maximum » no marginal relief

Q2 Maximum tax payable 3,000 @ 40% 1,200 Income:

39,000 @ 20% 7,800 Non-ref tax credits:

Married 3,300 Employee/PAYE 1,650 Age credit 490 5,440

2,360 Marginal relief (2,360 – 1,200) 1,160

Tax payable 1,200

Q3 Maximum tax payable 10,000 @ 40% 4,000

Income: 46,000 @ 20% 9,200

Non-ref tax credits: Married 3,300 Employee/PAYE 1,400

Age credit 490 Earned income 1,350 6,540

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Tax payable 2,660 Tax payable is lower than maximum » no marginal relief