CAP 1 Tax- Session 1 Introduction to Income Tax and Tax Credits/Reliefs

1. CAP 1 Tax- Session 1Introduction to Income Tax and Tax Credits/Reliefs

2. Learning Objectives Competence Statement Reference 1.3 By the end of today’s session, you should be able to: Compute income tax payable by individuals Apply tax reliefs and credits

3. Overview of Taxes IT CT CGT CAT VAT Stamp RCT Customs & Excise

4. Overview Who has responsibility for Irish taxes? Who collects taxes? What is self assessment?

5. The Legislation Taxes Consolidation Act 1997 Updated by Finance Acts annually Revenue statement of practices e.g. treatment of relocation expenses Case law and tax practice e.g. badges of trade ECJ decisions EU consent where relief supports sector or region e.g. Business Expansion Scheme

6. The Personnel Involved Minister for Finance Revenue Appeal Commissioners Commissioners Inspectors of Taxes Collector General

7. The Personnel Involved Revenue Commissioners - A Board of three people oversee the Taxation system Inspectors of Taxes are appointed by the Revenue Commissioners and are responsible for the day to day running of “Tax machine” in the five Divisions. (4 geographical regions + Large Cases Division) The Collector General is responsible for “Collecting the Cash”. Appeal Commissioners adjudicate between Inspectors of Taxes and Taxpayers.

8. Overview How is tax collected? PAYE system – wages, salaries, benefit in kind Self assessment system – self employed income, dividends, interest etc Deduction at source – DIRT, DWT, PAYE VAT

9. Self Assessment System Taxpayer prepares income tax computation Calculates tax Pays tax to revenue Due dates for IT return

10. Income Tax Overview Tax year - January to December Income tax is based on a person’s income Classes of Income Schedule D Case I to V Schedule E Schedule F

11. Proforma Income Tax Computation Income Tax Computation of __________________ for 2011 Total Income ____________ TAXED First €32,800 @ 20% ____________ SINGLE PERSON balance @ 41% ____________ ____________ Gross Income Tax Liability Less Tax Credits ____________ Net Tax Due ===========

12. Income Tax Computation Example 1 John is single. His total Income for 2011 is €45,000. His Tax Credits are €1,650 Compute his Income Tax liability JOHN Income Tax Computation of for 2011 € Total Income 45,000 TAXED First 32,800 @ 20% 6,560 SINGLE PERSON balance @ 41% 5,002 11,562 Gross Income Tax Liability (1,650) Less Tax Credits 9,912 Net Tax Due ========

13. Income Tax Computation Example 2 Catriona is single. Her total Income for 2011 is €27,000. Her Tax Credits are €3,300 Compute her Income Tax liability

14. Income Tax Overview Different classes of income =>different rules How taxable income is calculated How much income is taxed When income is taxable e.g. earned or paid basis. How losses can be used Income + Personal circumstances dictate the amount of tax payable e.g. Tax rates & Credits

15. Income Tax Rates & Bands 2011

16. Income Tax Computations Example 1: Married Couple

17. Income Tax Computations Example 2: Married Couple

18. Income Tax Computations Example 3: Married Couple

19. To Calculate Income Step 1 - Identify Income Step 2 - Categorise into Schedules & Cases Step 3 - Apply Rules of Computation of Income

20. Summary of Schedules & Cases Schedule D Case I Trading Income Case II Professional Income Case III Investment income received gross Case IV Investment income received net or income not taxed under any other Case or schedule. (The bucket!) Case V Irish rental income Schedule E - Income from employment Schedule F - Irish Dividend Income

21. Tax Credits and Reliefs and Charges on Income- Chapter 6 Tax credits and reliefs will typically, where available, reduce an individual’s tax liability. There are three broad types as follows: Non-refundable tax credits – relate to personal circumstances, can’t reduce tax below zero Deduction from income - pension, covenant Refundable tax credit – DWT, PAYE

22. Refundable v’s Non Refundable Tax withheld at source is generally refundable PAYE DWT DIRT – but only if over 65 or permanently incapacitated All other credits are non refundable Eg. Rent credit

23. Personal Tax Credits See chart page 140/141 Amount shown is the amount set against tax liability Depends on your personal circumstances Generally self explanatory

24. Widowed Tax Credit Widowed Person with dependent children: Widowed person credit (depends on circumstances) Single Parent Family Credit Widowed parent credit additional for first 5 years after bereavement “Dependent child”: Under 18, or If over 18, in full time education or permanently incapacitated

25. Single Parent Family Tax Credit Available to widowed or single parent with “qualifying child” Not available to unmarried couple living together. Available to both parents if not living together and jointly maintain the child (reside for whole or part of year) Same credit irrespective of no of children

26. PAYE Credit Available if in receipt of Schedule E (i.e. P60 income) Credit cannot exceed the amount of Schedule E income of the individual at the standard rate (Eg, salary €1,000 – max PAYE credit €200) Also available in respect of foreign employment where subject to foreign tax at source Not available to proprietary director or their spouse – more than 15% OSC Children of proprietary directors (who work in the business) only get credit if Employed for entire year, and Gross salary at least €4,572 PAYE Operated

27. Blind Person Credit if blind, double credit if both husband and wife blind Medical cert showing degree of blindness is required Credit for guide dog at STANDARD rate

28. Incapacitated child credit Credit available for each incapacitated child “incapacitated” defined (See page 143) If two or more persons maintain the child, allocated by reference to the amount spent by each on maintaining the child If entitled to this credit, not entitled to Dependent Relative Credit in respect of same child

29. Dependent Relative Credit Available if maintain a dependent relative at own expense Not available if income for dependent relative exceeds €13,837 in 2011 Two or more jointly maintain – apportioned “Dependent Relative”: Defined Page 144

30. Home Carer Credit Available to Married couple where jointly assessed One spouse works in the home caring for one or more dependents that reside with them (or within 2km radius) Only one credit regardless of number of dependents NB - Married couple cannot claim increase the standard rate band and the home carer credit Can claim what gives lower liability May be required to do this calculation

31. Home Carer Credit Home carer’s income is not in excess of €5,080 (excluding Carer’s Allowance) Reduced credit if income between €5,080 and €6,700: Credit is reduced by ½ of the excess over the limit If income exceeds limit in one year and was entitled to home carer credit in previous year, can claim amount claimed in prior year Example Page 145

32. Tax Reliefs at the Standard Rate Amounts vary depending on expenditure Granted at standard rate Credit against tax liability

33. Medical Insurance Premiums to VHI, Quinn, VIVAS etc Relief granted at source (“TRS”) Medical insurance company reclaims the tax relief from Revenue Special treatment for BIK’s Relief also available for dental insurance for non-routine treatment

34. Rent Credit Rent paid in respect of rented residential accommodation Not available where tenant is child of landlord Credit equal lower of rent paid at standard rate, or Specified level at standard rate Specified Limits – Page 148 Documents to be submitted: Form Rent 1 Receipt from landlord Credit is being phased out over the period 2011 to 2017 Relief is not available for new tenants on or after 7 December 2011.

35. College Fees “Qualifying fees” for “approved course” to an “approved college” QUALIFYING FEES: Un-reimbursed TUITION fees only registration fees not allowable APPROVED COLLEGE: college/university in the State/EU or non–EU member state which is maintained by public funds of that country

36. College Fees APPROVED COURSE Full time or part time undergraduate course at least 2 years long Postgraduate course, at least 1 year long but not longer than 4 years Finance Act 2007 – Defined relationship no longer required between claimant and student, i.e. student and claimant no longer required to be related. Credit further reduced in 2011- See Page 149

37. Training Courses Approved training courses in IT Foreign Languages Course results in awarding certificate of competence Fees paid at standard rate Maximum = €1,270 @ 20%

38. Service Charges Local authority service charges Allowed on preceding year basis E.g. service charges paid in 2007 – tax relief in 2008 Upper limit of €400 at the standard rate FA10 abolished this relief for tax years 2011 et seq

39. Energy Efficient Works Credit available for the carrying out of energy efficient works whose purpose is to reduce the cost of heating a residential premises. See Page 150 for limits Note: relief is subject to a commencement order which essentially means until such date the Minister commences the section, relief cannot be claimed for expenditure incurred.

40. Mortgage Interest Relief Relief granted at source (TRS – tax relief at source) Bank gives the credit by means of reduced monthly mortgage payment Applies in relation to loan to purchase, repair, develop or improve an individual’s sole/main residence Apply to Revenue for TRS to apply This relief is not available for investment properties

41. Mortgage Interest Relief Various ceilings apply depending on whether single/married/widowed or whether first time buyer Greater relief for first time buyers – available for first 7 years of mortgage Page 151 for ceilings – relief at the standard rate TRS is not available on the following loans but non refundable credit is: Loan to acquire property in NI or UK Non mortgage loans e.g. term loans for home improvements Loans from non TRS lenders e.g. employers, foreign banks Mortgage Interest discontinued for any mortgage over 7 years old on 1 May 2009( FA 2009). FA 10 reintroduced a tapering relief. (See Pg 152)

42. Medical Expenses Un-reimbursed medical expenses Incurred on your own behalf or on behalf of others Allowable expenditure listed on page 153 Examples of allowable: Prescriptions Doctors fees Hospital fees Maternity Care

43. Dental Expenses Routine Dental Care – Not Allowable E.g. fillings, extractions, provision of dentures Allowable Dental Expenses include: Crowns Orthodontic treatment Root Canal Dentist needs to supply Med 2 Form

44. Medical Expenses Routine Ophthalmic care - Not allowable E.g. eye tests, glasses and contact lenses To claim relief Form MED 1 may be submitted to Revenue. Receipts not required to be submitted but should be retained

45. Tax Reliefs at marginal rate Given as a deduction against taxable income Deductions rather than credits

46. Employment of Carer for Incapacitated Person Deduction if employ person to take care of family member who is totally incapacitated Deduction is lesser of amount paid or €50,000 Incapacitated child credit and/or dependent relative credit cannot be claimed where this credit is claimed See relief for nursing home expenses Page 155

47. Permanent Health Benefit Schemes Approved permanent health benefit schemes (loss of earnings etc) Deducted against total income Deduction restricted to 10% of total income Any benefits received under scheme are taxable.

48. Relief Job Assist – Long Term Unemployed If individual: Unemployed for at least 12 months Been in receipt of job seekers benefit/assistance Takes up employment at least 30 hrs/wk Capable of lasting at least 12 months Then entitled to deductions against income as set out on Page 155

49. Charitable Donations/Gifts Donations to: ELIGIBLE CHARITIES Approved as eligible charity by Revenue APPROVED BODIES Approved by Minister for Finance EDUCATIONAL INSTITUTIONS Primary, secondary, 3rd level institution APPROVED SPORTS BODY Established for sole purpose of promoting athletic or amateur games or sports

50. Charitable Donations/gifts - Conditions Minimum donation(s) of €250 in a tax year Must be in form of money Must not be repayable Must not confer any benefit on the donor Must not be conditional on the acquisition of property by the recipient by the donor Where donation to approved body restricted to 10% of total income Associated if employee of body or member of the body