Refunds, rebates and shopping around: Here is how to save €25,000
They claim their new book can save the average household €25,000 through better financial management. In an exclusive extract, personal finance editor Charlie Weston and co-writer Karl Deeter offer essential tips on saving money on tax and inheritance
Lesson 1: How to get a tax refund
Expected savings or earnings: €900
Time required: 4 hours
Difficulty level ★★★
The average household is estimated to be missing out on around €880 a year in tax refunds. Many people are failing to claim tax refunds and avail of tax breaks. According to tax practitioners, we are getting better at claiming what is ours from the Revenue Commissioners, but we are still not claiming everything that is owed to us. We need to get into a habit every year of claiming what due to us in tax refunds. After all, it is our money.
Tax efficiency has become more commonplace among the Irish public, but there are still thousands of people who will leave millions of euro with the taxman this year - don't be one of them.
This is especially important as austerity budgets have left a legacy of people paying more in taxes and charges, stealth and otherwise, than ever before. Pay cuts and job losses have also eaten into earnings for the average household.
Where the problem lies
Most people don't know that they are entitled to a refund of some of the tax they paid in the previous year. They may also have a justifiable fear of the taxman. They worry that interacting with Revenue will mean only one thing - that they will end up paying more tax. But you have nothing to fear from the tax authorities if you are honest, and lots to gain if you are failing to claim all your reliefs and allowances. The list of tax refunds for PAYE (pay as you earn) employees has narrowed considerably in the last few years, but you can still claim money back. Just because your employer automatically deducts tax every week or month does not mean that you can't get a portion of it back at the end of the year.
Many people are unaware that you can go back as far as four years. But once the four-year deadline passes, you are locked out of getting a refund. This means you could lose out on hundreds, even thousands, of euro.
Taxpayers may be put off by the hassle involved in getting refunds, and may be reluctant to have any dealings with the Revenue Commissioners, but it is worth noting that little effort is required. And it is not the case that Revenue officials deliberately make it difficult to reclaim tax. The opposite is actually the case. You can even use your mobile phone to make a claim. So why leave the money with the taxman?
How to fix it
You will need to dig out your PPS (personal public service) number, collect receipts, sign a form or two, wait two to six weeks, and you should get money back off the taxman. Alternatively, you can claim tax refunds online or on your mobile phone.
In some cases you can get a tax refund for specific expenses, for example medical expenses or mortgage interest. The value of a tax allowance will depend on whether it is allowed at the highest rate of income tax that you pay or is restricted to the standard 20pc rate. In simple terms this means that if you have a claim for €100 and you pay tax at 40pc, you can claim back €40. If the highest rate of tax you pay is 20pc, or the relief is restricted to the standard rate, the claim of €100 will reduce your tax by €20.
The savings explained
One of the easiest things to make a claim on is medical expenses. Relief can be claimed as a tax credit for unreimbursed medical expenses incurred on your own behalf or for others. You don't have to be related to any other individual whose expenses you might be paying. However, the relief cannot be claimed unless you have remembered to keep all your receipts. Expenses qualifying for relief would include the cost of doctors' and consultants' fees, prescription medicines, physiotherapy, and routine maternity care. The tax credit is 20pc of the amount of medical expenses which have not been reimbursed. It's possible to claim this credit in several ways - on your tax return, by submitting form MED 1 or by using Revenue's web-based PAYE Anytime service.
The fact that employees are allowed flat-rate expenses is often missed out on. Revenue has arrangements in place to grant flat-rate expenses for employees working in a range of activities.
Nurses, optometrists, panel beaters, grooms, musicians, journalists and air crew, to name just a few, may claim fixed expenses provided certain conditions are met. The easiest way to check if you are eligible is to go onto the Revenue website at www.revenue.ie and search for 'List of Flat-Rate Schedule E Expenses'. In limited circumstances, other expenses of employment can be claimed if you run them up "wholly, exclusively and necessarily", as the rule puts it. But this is very difficult to establish to Revenue's satisfaction. The costs of travelling to and from work are never allowed if you're an employee. That's partly why there are special allowances for bikes and travel passes.
It's worth noting that tuition fees for third-level courses will qualify for income tax relief at the standard rate of tax on most full-time and part-time courses. The relief is only available on the excess over €3,000 for full-time courses, and €1,500 for part-time courses. In general, this has the effect of allowing relief on the tuition fees on the second or later children. The taxpayer has the option of deciding which year to make the claim, i.e. either in the year of payment or the year of commencement of the course.
Many people wrongly believe that the Home Carer Tax Credit is for those caring for other people's children, the elderly or disabled people. They don't realise that it can be claimed where any housewife or househusband works in the home, caring for their own children. Having been increased recently to €1,000, this credit is more valuable than ever. It is available to any jointly assessed couple with one or more children, where the non-assessable spouse has income of less than €7,000 in 2016.
Claiming your medical expenses will take an hour or two. Gathering up your expenses and adding them together will take most of the effort. The MED 1 form will take 20 minutes to fill out. In the case of flat-rate expenses it is a case of applying to Revenue for the one that relates to your employment. To claim the tuition fees relief, complete the relevant claim form (available as a PDF, 214KB) and forward it to your Revenue office. This form can be filled out in 20 minutes. Allow four hours in total.
Claiming money off the Revenue Commissioners is less complicated than you might think. When you have done it once, it becomes even easier next time.
Some things to watch out for
People sometimes make the mistake of assuming Revenue have all the correct and relevant data on them. If a spouse or partner is claiming social welfare, they assume the tax officials know that, or they assume the tax authorities know they have a medical card. Government departments do not share as much information as we think. It is worth your while ensuring that Revenue has the correct details on your tax affairs.
Revenue - www.revenue.ie - and www.citizensinformation.ie contain a raft of information.
How to handle Inheritance Tax
Expected savings or earnings: €3,000 a year
Time required: 1 day
Difficulty level: ★★★★
There are only two certainties in life: death and taxes. That is the famous quote from one of the founding fathers of the United States, Benjamin Franklin. And the two certainties are linked when it comes to inheritance tax. The big certainty about inheritance tax is that if you do not have a plan, and you own or receive assets, the risk is that you will end up paying inheritance tax. And we have a rather high inheritance tax rate of 33pc in this country. Many people deeply resent this, as they feel it is a punishment for prudence. People who have spent their life using their taxed income to build up and pay for an asset like a home would not be best pleased to see a chunk of the value of that asset ending up in the hands of Revenue when they pass it on to the next generation. The bottom line is that if you fail to prepare, then prepare to pay inheritance tax when it comes to passing on assets at death.
Where the problem lies
A wife, husband or civil partner can inherit from their spouse or civil partner without paying inheritance tax. Everyone else has to pay the tax. The official name for inheritance tax is capital acquisitions tax, sometimes referred to as CAT. This tax can be broken down into two types: a) gift tax, which is payable when a person giving the gift is still alive; and b) inheritance tax, which is payable when the person giving the gift has died.
There are tax-free thresholds, but amounts over these mean you are liable to pay CAT at a wallet-busting rate of 33pc for anything over these threshold amounts. This is one of the highest rates in the western world. But it should also be noted that the tax-free thresholds are reasonably generous for sons and daughters who inherit. The other tax-free thresholds are low if the giver has no children. Different tax-free thresholds apply depending on the relationship between the person giving the gift (the disponer) and the beneficiary. The tax applies on all property in Ireland. It also applies if the property is not in Ireland, but the person giving the benefit or the person receiving it is resident in Ireland for tax purposes. However, even with the tax-free threshold, an only child inheriting a house worth €400,000 from parents in the tax year 2017 would face a bill of €29,700.
The tax is calculated based on the market value of the inheritance on the date of death. To calculate your inheritance tax liability, you take the value of the asset at death. You then subtract the tax-free threshold amount from this. What is left is taxed at a rate of 33pc. It is worth noting that you can deduct any liabilities, costs and expenses that are properly payable from the value of the asset. These might include debts that must be paid. For example, there may be funeral expenses, the costs of administering the estate, or debts owed by the deceased.
For a gift, they could include legal costs or stamp duty, according to information on the tax from the Revenue Commissioners and the Citizens Information Board. The tax can become even more expensive if you are late paying it. This is known as a surcharge and applies to the late paying and filing of CAT.
The surcharge is calculated as a percentage of the total tax payable for the year the return is late. It goes up, depending on the length of the delay. The only good news on this is that there is a cap on the level of the surcharge. For someone who is no more than two months late, the surcharge is 5pc of the tax due, up to a maximum of €12,695. If you are more than two months late, the surcharge is 10pc of the amount due, up to a maximum of €63,485.
How to fix it
There are three ways to either avoid the tax or lessen its impact. Your options are to ensure you use the tax-free thresholds, avail of exemptions, or benefit from a relief. Evading the tax is not something we would advise. Getting good professional tax advice is something that is certainly worthwhile, especially if there is a likelihood the benefits being passed on will exceed the tax-free thresholds in value.
When it comes to tax-free thresholds, there are three different groups. Different tax-free amounts apply to each group.
* Group A: the person receiving the gift is a child of the person giving it. This includes a stepchild or adopted child. It can also include a foster child in certain circumstances. l Group B: the person getting the gift is a brother or sister, nephew or niece of the giver, a grandparent, grandchild or great-grandchild.
* Group C applies to any relationship other than those in Groups A and B.
The annual gift exemption means you can receive gifts of cash worth up to €3,000 a year tax-free. And this does not count when calculating the inheritance tax-free threshold, according to solicitor Susan Murphy of Make My Will, a low-cost service for making your will where you provide your instructions via email through a secure service, or you can be contacted by phone at a time that suits you. It does not apply to inheritances, because the giver is still alive.
Business or agricultural relief may apply to gifts and inheritances of business or agricultural property provided certain conditions are met. It operates by reducing the market value of business or agricultural property by 90pc. This means the inheritance tax is calculated on an amount which will be significantly less than the market value.
The savings explained
Take a home with a market value of €450,000 which is passed on to a son and a daughter. As they have a tax-free threshold of €310,000 each, neither of them will be liable for the tax. This is because they are each inheriting a €225,000 share of the house.
If there is only a daughter who is inheriting a house of the same value, she faces a tax bill. The bill will be the threshold less the value of the house. That means you subtract €310,000 from €450,000. This leaves €140,000. That is taxed at 33pc. The bill comes to €46,200.
Now suppose you received a previous threshold from your parents. You were generously given a gift of €20,000 to help you put a deposit together for a house. This will reduce the threshold when the home is inherited.
This is an area you need to devote time to. Allow at least a day for seeking out information and consulting with a legal or financial adviser if you are passing on assets or receiving them.
Tax matters tend to confuse people. We recommend you take time on this one, and you would be wise to seek out professional help.
Some things to watch out for
Making a will is advisable. If you die without one, the law on intestacy will decide what happens to your property. Having a will in place will mean proper arrangements are made for your dependants, and they may be able to avoid a hefty tax bill. It will also ensure your assets are distributed in the way you wish after you die, subject to certain rights of spouses/civil partners and children.
There are fixed dates for paying and filing a CAT return. All gifts and inheritances with a valuation date in the year ending on August 31 must be paid and filed by October 31. What this means is that if the valuation date is between January and August in any year, you must complete the tax return and pay the tax on or before October 31 that year. If the valuation date is between September and December, you must complete the tax return and pay the tax on or before October 31 the following year, according to Revenue.
The Revenue website (www.revenue.ie) has comprehensive information, but is difficult to follow. Also worth checking are www.citizensinformation.ie, and www.makemywill.ie.
This Book is Worth €25,000 by Karl Deeter and Charlie Weston is out now