Know your taxes - Ireland

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Pre-tax money.You will often hear the expression " You can pay for [something] with pre-tax money". This mean that the i...
27/11/2020

Pre-tax money.

You will often hear the expression " You can pay for [something] with pre-tax money". This mean that the item is deductible or it can be paid for automatically in the form of payroll deduction.
The reason they are referred to as "pre-tax" money is that you get to spend this money before government takes its cut. This makes "the purchase" more cost effective for you.
Some people are under the impression that something is free simply because it's deductible or simply because they were allowed to spend pre-tax money on it. It is a misunderstanding. By being able to spend pre-tax money is more like getting a discount on the item.
Some example are:
Medical Insurance premiums - the amount paid to the insurance company is 80% of the premium due. The insurance company claims the other 20% from the revenue.
Pension contributions - relief will depend on personal circumstances (age, wages)
Employment Investment Incentive Scheme (EIIS) - This scheme allows tax relief for the cost of purchasing shares in certain companies. The scheme allows the individual to claim a deduction against income for the cost of investment up to max of €250,000 provided that the shares will be held for a period of four years. The relief is increased to €500,000 if the shares will be held for seven years.

26/11/2020

Deduction and Credits: Whats the difference?
Deductions reduce your taxable income, while credits reduce your tax.

Deductions generally arise from your expenses such us fees paid for third level education or medical expenses.
Relief on medical expenses will be granted at 20%, regardless of the rate of tax paid by the taxpayer.
Most common medical expenses that can be included when calculating the tax relief are:
☑️ Services of a GP or a Consultant;
☑️ Prescription costs (subject to max €124/month)
☑️ Physiotherapy costs when prescribed by a GP;
☑️ Maternity costs;
☑️ Transport by ambulance;
☑️ Non-routine ophthalmological and dental costs;

When calculating tax relief for third level education fees paid, must take into consideration:
➡️ Tax relief is not available for the first €3000 (full time course) or €1500 (part time course)
➡️ The relief will be 20% of qualifying fees.

Example: Andy's son, Bob, is attending full-time undergraduate degree. Andy is paying €7000 on behalf of Bob for September 2020. Andy also pays for himself €120/month for prescription drugs also he has an expense of €300 for prescription glasses.
When calculating his tax liability for 2020 Andy can include:
➡️ €800 tax relief for full-time undergraduate fees (€7000 - €3000 = €4000x20%)
➡️ €110 x 12 month = €1320x20% = €264 ( prescription drugs)
➡️ Prescription glasses do not qualify for tax relief.

Credits.
Unlike deduction, credits reduce your taxes directly. euro for euro. After determining the amount of tax you owe, you subtract the value of the credit for which you are eligible.

25/11/2020

Income tax it's progressive!
What the term means is that, as your taxable income increase, so does the rate at which you are taxed.
People will often make statements such " I am in the 40% bracket". For example a single person with a taxable income of €65,000 would be in the 40% bracket. That is misunderstood as it will mean all of the person's income is taxed at a rate of 40%. In reality the person overall income tax rate is much lower.

Taxation for the 2020 tax year.

Single -- €35,300 @20%/Balance at 40%

Single Parent -- €39,300 @ 20%/ Balance @ 40%

Married or in a Civil Partnership - one spouse with income -- €44,300 @ 20%/ Balance @ 40%

Married or in a Civil Partnership - both Spouses with income -- €70,600 @ 20%/ Balance @ 40%

Example:
Andy is single and he is employed. He earns €65,000 in 2020.
This put Andy in the 40% bracket. If that meant that all his income will be taxed at 40% he should be paying €26,000 in income taxes. Instead he will be paying much less. Here is how we calculate:
€35,300 at 20% €7,060
Balance €29,700 at 40% €11,880

Total €18,940

24/11/2020

According to Department of Finance, in 2019, Income Tax receipts were just over €22.9bn which is consistent with previous years. VAT was the second largest contributor in 2019 with Exchequer returns of €15.1bn followed by Corporation Tax receipts of almost €10.9bn.
In simple words, the burden is on Income tax payers, contributing approximately 39% to the total Government Exchequer.
Knowing your taxes can be quite valuable even if you don't prepare your own tax return. The reason is that by the time your accountant is preparing your tax return it's frequently too late to do any of the things that you could have done over the course of the year to reduce your tax burden.
Stay tuned ▶️

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