AS another year draws to a close and the dawn of a new one approaches, perhaps it is time to consider if we are spending our money prudently in order to minimise our tax bill.
Tax reliefs are there for a reason – be it social, environmental, economic, or to provide a reasonable standard of living for people. In this article, I will outline methods of spending money efficiently in order to enable us to reduce our tax liability.
A child living at home working on a family business or farm can earn up to €8,500 tax-free while still attending school/college. If they work full-time in the business, they can earn €16,500 tax-free. A person aged 65 or over can earn €18,225 tax-free or €36,450 if married.
Therefore, elderly people who work on a family business or farm can earn money tax-free, depending on their sources of income.
Where a spouse is involved in the business and has no other income the option of giving them some income should be examined. With individualisation a spouse can earn an additional €27,800 at the 20% rate which can result in a tax saving of €5,560. There are also PRSI and USC benefits to be gained from individualisation.
Wear and tear is an annual capital allowance in respect of the depreciation of equipment. This is normally allowed at the rate of 12.5% for equipment or 15% for farm buildings. However, there is an incentive scheme for the purchase of energy-efficient equipment known as accelerated capital allowances. This is a tax incentive that promotes energy efficient equipment.
This incentive allows a sole trader, farmer or company that pays income tax or corporation tax to deduct the full cost of the equipment from their profits in the year of expenditure, rather than spreading it over eight years. The equipment must be new. Typical examples are solar panels on farm buildings.
For cars coming under the category ‘electric and alternative fuel vehicles’, the accelerated allowance is based on the lower – the actual cost of the vehicle, or €24,000.
If a motor vehicle does not fall under the above, capital allowances are based on the emissions-based scheme which was introduced in the 2008 Finances Act. Under this scheme the capital allowance is allowed over a period of eight years at 12.5% per annum.
However, the amount allowed for capital allowances is not what the car costs, but what CO2 it produces. If a car produces less than 141 grammes of CO2 per kilometre the amount allowed for capital allowances is €24,000 whether the vehicle cost €1 or €100,000.
For vehicles in categories D and E, which is a car producing 141-190 grammes of CO2 per kilometre, the cost of the car for capital allowance purposes is:
• 50% of the cost of the car, where the car costs less than €24,000
• 50% of €24,000, where the car costs more than €24,000
• No capital allowances are allowed where a car produces 191 grammes of CO2 or more.
When spending money, it is very important to be aware of the tax incentives that may be available. I often find the motor vehicle allowances are often overlooked. The allowances outlined above are all readily available and do not require any tax planning. They are like lifting a stone and finding something underneath.