Ease the burden of tax returns

How to avoid five major pitfalls when filling in the forms

ALMOST half a million people are busy preparing their tax return ahead of this year’s tax deadline. Should you be one of these individuals, you have between three weeks and one month to file your return now, depending on whether you’re filing a return on paper or online. Failure to file a correct tax return on time could see you being hit with interest and penalties, having your name published in a list of tax defaulters — and in some cases, facing prosecution. So it’s important to get it right.

Here are some of the most common mistakes people make when filing their tax return.

Claiming too few tax breaks

You will pay more tax than you need to if you don’t claim all the tax breaks you’re entitled to.

Parents often forget to claim the tax relief for the student contribution charge, according to Suzanne O’Neill, private client partner with RSM. The tax relief on tuition fees allows you to claim back up to a fifth of the cost of the student contribution charge, but only for any second or subsequent children in third-level education. This tax relief is currently worth €600 if you have two children in full-time thirdlevel education.

Another tax break often overlooked is the PRSI exemption for those over the age of 66. You are not liable for PRSI contributions after the age of 66 — whether you are employed or self-employed. “Some people who are over 66 forget to claim the exemption from PRSI,” says Michael Gaffney, tax expert with KPMG. “The system then incorrectly charges them PRSI. If you have paid PRSI by mistake in previous years, it might be possible to claim a refund.”

Don’t forget to claim the annual €1,270 Capital Gains Tax (CGT —the tax paid on profits earned from the sale of certain assets) exemption if declaring a profit you made from the sale of a house or shares. With this exemption, the first €1,270 of an individual’s chargeable gains are exempt from CGT. “Avoid the mistake which some over-enthusiastic married taxpayers make of claiming two exemptions,” advises Gaffney. “Each spouse can claim €1,270 against their own gains but one spouse can’t claim both exemptions.”

Claiming the wrong tax breaks

Claiming tax reliefs you’re not entitled to could land you in trouble with Revenue because it could see you paying less tax than you should.

Be careful when claiming tax relief on medical expenses. “Not all expenses are eligible for relief,” explains Audrey Lydon, head of private client services at Ersnt & Young. “For example, expenses that will be reimbursed fully by a medical insurer — and routine dental and ophthalmic expenses — don’t qualify for relief.” Routine dental expenses include fillings and standard extractions; while crowns and root canal treatment are considered non-routine.

You cannot usually claim the PAYE tax credit if you are self-employed so should you have recently given up a full-time job as an employee to become self-employed, you could slip up here. It is the 2015 tax return which is being filed this year. Should you have spent some of 2015 working as an employee before you became self-employed, you can still claim the full PAYE credit — as long as your PAYE income for 2015 was above €8,250. However, if your income for 2015 was purely from self-employed work, you can no longer claim the tax credit.

“Another typical mistake is where some company directors incorrectly claim the PAYE credit,” says Gaffney. “If you own more than 15pc of your company, this can’t be claimed.”

Last year’s Budget announced a new tax credit for self-employed individuals. However, that tax credit, which is worth €550, cannot be claimed until next year — when you file your tax return for 2016.

The home-carer tax credit is often claimed incorrectly, according to O’Neill. This credit can be claimed by those who look after a child or elderly person in the home — as long as certain conditions are met. For example, a parent or guardian will not qualify for the home carer tax credit if the child they look after isn’t eligible for child benefit. Once a child reaches the age of 16 — or the age of 18 if in full-time education, he no longer qualifies for child benefit. “People sometimes claim this credit if their child is over 18 as they mistakenly think they can still claim it when their child goes to college,” says O’Neill.

Claiming the wrong landlord expenses

There are more than 160,000 landlords in this country and a huge tax windfall is expected from them this year — due to the high rents they’re pocketing.

One of the most common mistakes made by landlords — particularly ‘accidental’ landlords who are renting out a property because they inherited it or were caught in the property bubble — is that they write the wrong expenses off their rental income tax bill.

Some landlords assume they can write the full cost of the mortgage repayments on the rented property off their tax bill. This is not the case. You can usually only write off 75pc of your mortgage interest against rental income. You cannot write off the full amount of mortgage interest or indeed the full mortgage repayment. As your mortgage interest is usually only a portion of your mortgage repayment, the tax bill on your rental income could leave you substantially out of pocket if you’re only getting enough rent to cover your mortgage repayments — or indeed, if you can’t even secure the rent to cover your repayments.

(Since the start of this year, landlords renting to social housing tenants for a period of three years can write off the full cost of the mortgage interest on the rented property. However, as you can only apply for this relief when the three years are up, it will be 2019 before you can claim it).

You can write the costs of repairs and maintenance of the rented property (such as painting, decorating, the cleaning of gutters, and the mending of broken windows) off your tax bill. You can also claim back the cost of accountant’s fees for preparing your rental accounts, management fees paid to a letting agent, and insurance (such as home or mortgage protection insurance on the rented property). In addition, you can write off the cost of expenses of a capital nature, including the purchase of new fixture and fittings (such as tables, chairs and sofas), and the replacement of a heating system or all of the windows.

There is an important difference however between how you claim back the cost of capital expenses — and the cost of repairs. You can write off the full cost of repairs and maintenance in the year that the cost is incurred — but you must claim back the cost of expenses of a capital nature over eight years.

You can’t claim back any expenses incurred before you started letting out a property, with the exception of auctioneer letting fees, advertising costs, and legal costs. Neither can you claim back the cost of your own labour should you repair the rented property yourself.

Underdeclaring your income

It is the deliberate underdeclaration of income which could see you being prosecuted by Revenue. So it is important to declare all of your income, even if some of it is not taxable.

“The self-employed don’t always appreciate that they must report all of their income on their tax return and not just their self-employed business income,” says Lydon. “Other income that should be reported includes PAYE income, dividends, interest, rental profits and gains or losses on the sale of assets. Exempt income such as forestry income and rental income covered by the rent-a-room relief should also be reported. Depending on the individual’s marital status, the spouse’s income and gains should also be reported if the couple are jointly assessed for tax purposes.”

Leaving it until the last minute

Give yourself plenty of time to file your tax return as you are more likely to make mistakes if you leave it until the last minute.

“Many things can go wrong with your computer or your ability to access or operate the Revenue Online System (ROS) when filing online,” says Gaffney. “These things can be solved but the stress of doing so with the filing deadline approaching is worth avoiding. If you have a complicated tax return, you will need time to get all your information ready.”