How to sidestep the grasp and clutch of Mr Taxman
Published 19/01/2014 | 02:30
We're all sick to the teeth of tax. The tax hikes of the last few years mean that many of us are kissing goodbye to more than half of our salary in tax --a bitter bill to swallow at any time, but particularly so when we are working longer and harder than ever before. We also have to cough up for property tax, and the bills for water charges will soon arrive.
At times like this, it makes sense to do whatever you can to slash the amount of tax you have to pay. So how might you get one over the taxman?
TAKE EARLY RETIREMENT and SET UP SHOP
You could save hundreds of thousands by taking early retirement -- and then setting yourself up as a contractor, according to Cathal Maxwell, who runs the tax-saving website paylesstax.ie.
Your boss must, of course, offer a scheme for you to be able to do so.
The key to saving the tax is to be able to put off paying yourself for your work as a contractor until you retire for good. You will therefore need to have a good pension from your old job.
"A lot of contractors are highly-skilled individuals who took early retirement from semi-states, the banks and other large organisations," said Maxwell. "Let's say you're a 55-year-old who takes early retirement and then sets up as a limited company offering contracting services. You have a pension from your old job --so you are not depending on an immediate income. Your earnings from the contracting service over the 10 years to the age of 65 is €1.5m. You accumulate the profits in the company and finally retire at the age of 65 -- and take out all the accumulated profit."
The total amount of tax you would need to pay on the accumulated profit would be €440,500. Had you stayed in your day job and not taken early retirement, your tax bill on earnings of €1.5m over 10 years would have come to €750,000, said Maxwell.
So in this case, you could save €300,000 in tax -- or about €600 a week -- by retiring early and setting yourself up as a contractor.
The savings are made because the company tax and capital gains tax you pay as a contractor who sets up his own company work out less than the normal income taxes and levies for employees.
However, if you decide to set yourself up as a contractor, be careful about the expenses you write off against tax. The Revenue Commissioners is currently investigating the tax affairs of contractors as it believes some expenses were wrongly written off. So before you write off any expenses against your tax, make sure you are entitled to do so -- otherwise you could face hefty penalties.
HIRE YOUR OWN KIDS
If you run your own business, paying your children a salary to help out with the business could save you thousands of euro in tax a year.
For example, let's say you're a sole trader and you make an annual profit of €50,000. Your tax bill is about €13,000. You are married with two children under the age of 16. Your children help out a lot with your job so you decide to pay them €150 each a week. After doing so, your tax bill will fall to about €6,600 -- saving you €6,400 a year, according to Maxwell.
If you decide to hire your children so that you can slash your tax bill, make sure you meet all the tax rules. You will need to register as an employer and the employment must be genuine.
"Children can be paid a salary for work they do and can earn up to €8,250 tax-free working part-time in a family business," said Maxwell.
RENOVATE YOUR HOME
If your home is in dire need of a new heating system or other renovations, get the work done before the end of next year, otherwise you could lose out on a tax break which could be worth thousands of euro.
Under the new home renovation incentive scheme, you can claim back the 13.5 per cent value added tax (VAT) which you would normally pay on home renovations. So if a builder charges you €10,000 to rewire your home, you'll be entitled to a tax refund of €1,350. If you spend €12,000 putting on a new roof, you'll get €1,620 back in tax.
Make sure you are entitled to the tax break before you give the go-ahead to the renovations. You are only eligible if the work is carried out on your own home, if you pay income tax, and if you have paid your property tax. You must own the home that you claim the relief on. You cannot get the tax break if you pay for renovations on your parents' home -- even if you live there.
The works must be carried out on or after October 25, 2013, and up to December 31, 2015. If you spend less than €4,405 before tax on the renovations, you won't be entitled to a tax break. For details, see www.revenue.ie.
DRIP FEED YOUR INHERITANCE
If you plan to leave a hefty inheritance to your children or grandchildren, drip-feed your inheritance while you are still alive -- as long as you can afford to do so.
This should cut back on the amount of tax that your children or grandchildren will have to pay on their inheritance. Your relatives can get gifts worth up to €3,000 a year without paying tax. Such gifts can include cash, jewellery, car, land, stocks or shares. As the €3,000 limit applies to gifts from each donor, where both parents are alive a child is entitled to get gifts of up to €6,000 a year tax-free from them.
Plan your inheritance so those who receive it pay as little tax as necessary. A son or daughter can inherit up to €225,000 tax-free; a brother or sister can inherit up to €30,150; and anyone else can inherit up to €15,075 tax-free.
"When considering leaving money to someone, think about sharing the inheritance with their spouse or children, to maximise each person's threshold," said Oonagh Casey, tax partner with tax advisers, Fagan & Partners.
So if for example you're planning to leave an inheritance of €50,000 to your brother, if you left €30,150 to him, €15,075 to his wife and €4,775 to one of his children, tax won't have to be paid on the inheritance. However, if you leave the entire €50,000 to your brother, he will have to pay inheritance tax on €19,850, which adds up to a tax bill of €6,550.50.
If you are planning to leave investment properties to your children, you could save them hundreds of thousands of euro in tax by encouraging them to move into those properties before you die. As long as your children have been living in the property for at least three years before inheriting it and meet other conditions, they should not have to pay inheritance tax on the property.