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moreOne of the biggest mistakes to make with this year’s tax return is not filing one because you wrongly believe you don’t need to. – Louise McBride
With only nine days to go to the October tax deadline, the clock is ticking for taxpayers who file their own tax returns – if they are doing so on paper.
Otherwise, November 14 marks the tax return deadline – as long as their return is filed online.
It is as important to get your tax return right as it is to file it on time. Here are some of the biggest mistakes people make.
Ignorance
“Many individuals who are not self-employed are unaware they have self-assessment obligations [namely to file a tax return and pay whatever tax is due], said Susan Reilly, a senior manager with Deloitte’s private clients division.
It is not only the self-employed who must file a retun. Anyone receiving income that cannot be taxed in the normal way must usually do so too – and pay whatever tax is due. That income could include rent earned from an investment property, money earned from Airbnb or nixers, share dividends, foreign income and foreign pensions, and any profits you make from exercising share options.
“Some of those caught in the self-assessment tax net include individuals who have opened a foreign bank account, individuals who acquired a foreign life policy, a material interest in an offshore product or fund, or someone who has sold an asset liable for Capital Gains Tax (CGT),” said Reilly.
Even if you are earning income that is exempt from tax, you may still need to file a tax return and declare that tax-exempt income on your return. This, for example, is the case with the rent-a-room relief scheme, where up to €14,000 a year can be earned tax-free by renting a room in your home.
“Individuals who have income to which the rent-a-room relief-exemption applies and whose only other income in employment taxed under PAYE, or who have no other source of income, must file an income tax return,” said a spokeswoman for the Revenue Commissioners.
Of course, should you be self-employed and earning tax-free income under the rent-a-room scheme, you must also declare that exempt income in your tax return.
Some proprietary directors of companies may be unaware of their obligation to file a return. A proprietary director is the beneficial owner of – or an individual who controls – more than 15pc of the ordinary share capital of a company. “Proprietary directors are obliged to file tax returns – even if they have no income other than their PAYE income,” said Suzanne O’Neill, private client partner with RSM.
“Directors are heavily penalised for failure to file a tax return – with a surcharge applied to their tax liability before the PAYE already paid is deducted.
Small nixer
Should you be a PAYE taxpayer earning a small amount of money outside the PAYE system, you may not have to file a tax return if the extra income is below certain limits – generally, profit of no more than €5,000 or gross income of no more than €30,000 – as long as you come to an arrangement with Revenue to have the income tax on the extra earnings paid though the PAYE system.
In such a case, you would need to contact Revenue and advise it of your extra income – and Revenue may then agree to reduce your tax credits and tax rate band by an amount equal to your other income. So your additional income would effectively be taxed under the PAYE system and no tax return would be required (unless specifically requested by Revenue).
If no such agreement can be reached you must file a tax return. Furthermore, should your gross non-PAYE income be more than €30,000, you must file a self-assessment return – regardless of the level of profit.
Just sold a house?
Another tricky area in which people could easily get caught out is in relation to any Capital Gains Tax bill due from the sale of an investment or second property. The reason for this is that any CGT due must typically be paid in the year the property is sold – though it is usually the following year that any profits made from that sale are declared in a tax return.
So should you have sold a property in 2016 and be liable for CGT on any profits made from the sale, in most cases you should have already paid you CGT bill last year – even though you’re only declaring the profits made from the 2016 sale when filing your tax return this year.
Similarly, should you have sold a property in 2017 and face a CGT bill as a result, you don’t have to declare the profit from the sale until you are filing your tax return in 2018 – though you must usually settle your CGT bill in 2017.
“If the sale of a house (such as an investment property) in 2017 gives rise to CGT, the CGT must usually be paid in 2017,” said O’Neill.
“If the contract for sale is signed between January 1, 2017 and November 30, 2017, the CGT must by paid before December 15, 2017. The CGT on sales arising in December 2017 will have to be paid by January 15, 2018.
The actual details of the 2017 sale do not get reported until 2018 in the 2017 tax return, which is to be filed by October 2018.
“There is a key difference between the date the contract is signed and the date the sale closes – the earlier date dictates when the CGT must be paid.”
Tax reliefs
It is important to claim all the tax reliefs and credits you are entitled to when filing you tax return – and to write any tax-deductible expenses off your tax bill. However, claiming reliefs you are not entitled to could land you in trouble with Revenue.
One area in which you could easily slip up here is the tax relief on medial expenses. Not all medical expenses are eligible for relief and it can be easy to get confused between those that do and those that don’t.
“Tax relief is allowable on medical expenses, but routine dental (such as fillings) and optical expenses are not eligible for relief,” said O’Neill.
“Physio costs can be treated as medical expenses – if availed of on referral from a GP.”
Similarly, landlords are entitled to write certain expenses off their tax bill for rental income, but they don’t always get it right. Some landlords mistakenly believe they can write the full cost of the mortgage repayments on the rented property off their tax bill. This is not the case.
You cannot write the full cost of mortgage repayments off your tax bill, and you can usually only write-off 75pc of your mortgage interest against rental income earned in 2016.
When filing 2017 returns next year, landlords will be able to write off 80pc of the interest.
Furthermore, landlords are only entitled to write off expenses that arose while the property was let, (though under Budget 2018, owners of vacant properties will be able to write off pre-letting expenses in certain circumstances.)
“When writing expenses off your rental income, you must review the nature of the expenses, periods the property was not available to let, whether tenants receive social housing support and so on,” said Reilly.
Landlords must be careful not to overlook any tax-deductible expenses: “Where rental income is taxable, deductible costs might be missed – such as capital allowances, on the initial fit-out of the house, and life assurance on the mortgage,” said O’Neill.
Another area for mistakes is investments - particularly how you record and treat those investments in your return, according to Reilly. “Investment funds is a particularly tricky area of tax legislation to navigate,” said Reilly.
Consider getting some professional advice before filing your return if you have complex dividends or investment portfolios.
Useful resources
https://revenue.ie/en/self-assessment-and-self-employment/documents/guide-pay-file.pdf
This is a comprehensive guide from the Revenue Commissioners on how to complete an income tax return for 2016. The main purpose of this guide is to assist individuals taxed under the self-assessment system (such as self-employed individuals, and landlords and other who earn a certain amount of income outside the PAYE system) to complete their 2016 return using Form 11.
https://www.revenue.ie/en/self-assessment-and-self-employment/documents/form11.pdf
The Form 11 tax return form. This form is mainly used by self-employed people to file their tax return.
https://revenue.ie/en/self-assessment-and-self-employment/filing-your-tax-return/index.aspx
This link provides detailed help (including several videos) on how to complete the Form 11 online.
https://www.revenue.ie/en/self-assessment-and-self-employment/documents/form12.pdf
The Form 12 tax return form. Form 12 can be used by PAYE individuals whose main source of income is their PAYE job, but who also earn non-PAYE income (below specific limits), such as rental income, investment income, occasional income or share options. Form 12 can also be used by pensioners. As an example, if you are a pensioner earning income on which tax must be paid, you must usually fill in a Form 12 – provided you are not already being taxed on that income.
https://revenue.ie/en/self-assessment-and-self-employment/guide-to-self-assessment/index.aspx
This guide will tell you if you fall within the self-assessment tax net, and so need to file a tax return. The guide also explains preliminary tax, which is something about which anyone filing a tax return as a self-employed person or landlord for the first time needs to be particular aware. Tax payers are currently filing their return for income earned in 2016. But 90pc of what you expect you tax bill to be for income earned in 2017 (known as preliminary tax) must also be paid this year. So should this be your first year filing a tax return, you’re almost facing a double tax bill. If this isn’t your first year filing a tax return, you should already have paid your preliminary tax for 2016, which means you should only have about a tenth of the tax bill for 2016 left to pay (as long as you correctly calculated your preliminary tax last year) plus 90pc of your estimated tax bill for 2017.
This link explains how the tax relief on medical expenses works. It gives a list of the various medical and dental expenses that qualify for relief – as well as the expenses that don’t qualify. It also explains how to apply for tax relief on medical expenses.
As published in Sunday Independent, 22nd October, 2017