Avoid perilous pitfalls when filing your tax return

It’s that time of year again, when we wish we’d been a bit more organised rather than leaving Revenue returns to the last minute but, before you file, read this and steer clear of new traps

IT’S THAT time of year again – the October 31st deadline is fast approaching and many self-assessed taxpayers will once again be kicking themselves for not getting started on their tax returns earlier. Now they have just a matter of weeks in which to file their 2010 tax return, pay off any balance owing from that year and source a preliminary tax payment for 2011.

In the last-minute rush to stay on the right side of the Revenue and get all of this sorted on time, it’s all too easy to make costly mistakes. Not only are there perennial pitfalls that catch people out year after year, but new changes to the tax regime bring fresh problems. Here we take a look at the tax traps lurking out there this year and, more importantly, how to avoid them.

THE ACCIDENTAL LANDLORD

So you bought yourself a singleton’s pad a few years back, then met the love of your life and moved into his or her pied-á-terre. Your property wouldn’t sell so you’ve let it out, but the rent doesn’t quite cover the mortgage. It’s not ideal but at least you don’t have to worry about any tax implications because you’re making a loss, right? Wrong.

Remember that emergency Budget back in 2009? Well unfortunately for landlords, it restricted the amount of mortgage interest that could be offset against rental income to 75 per cent, from 100 per cent.

“It’s going to turn it right around for people,” says John O’Connor of rentalincome.ie. “People are going to start having profits now who had losses previously.”

Say for example you previously received €5,000 a year in rent, but your mortgage interest payments came to €6,000. In the past this would have resulted in a loss of €1,000. However now you can only deduct €4,500 for tax purposes (ie, €6,000 x 75 per cent), and so you could be taxed on €500 even though in reality your old bachelor pad is losing you money.

Hard as this may be to swallow, it’s time to start declaring your rental income. “You really, really need to get on top of it now, because Revenue are looking into landlords a lot more now,” O’Connor says. Accidental landlords, you’ve been warned.

PROPERTY PITFALLS

While we’re on the subject of rental income, we’d better address another bugbear of landlords – the annual €200 second home charge, or the non-principal private residence (NPPR) charge to give it its proper title. You might say that €200 won’t break the bank, but if your property is divided into different flats, bedsits or apartments, this charge applies to each of the units so it can add up. And what’s worse is that many landlords aren’t aware that you can’t write off NPPR payments as an expense for tax purposes.

One last word of warning for landlords: if you’re fortunate enough to be turning a profit on a foreign rental property, remember that you can’t offset that overseas profit with a rental loss on an Irish property (or vice versa) in order to reduce your tax bill.

KEEP TRACK OF EXPENSES

Despite all those New Year resolutions to keep a fastidious financial filing system, by this time of the year many of us are desperately rummaging through shoeboxes overflowing with every kind of document except the very one you need to complete your tax return. Why not say goodbye to disorganisation once and for all and embrace the technological innovations designed to make life easier?

Take the free Red Oak “Snap!” iPhone application, for example. Fresh on the market (it was launched on redoak.ie on October 12th) this canny little app uses smartphone technology to make record-keeping a doddle. Every time you pay for something that may be tax deductible (whether it’s a root canal or a tin of paint for your rental property), capture a record of the receipt by snapping a photo of it with your phone. When the time comes to make a claim, simply log in to your online manager to access your records.

Another option is Revenue’s popular PAYE Anytime health expenses app, which serves as a diary-style medical costs tracker and allows you to submit a tax refund claim to Revenue.

DON’T ASK, DON’T GET

When people decide to recoup their medical costs, the first port of call is their private health insurer. But what many of us forget (or don’t bother to pursue) is the fact that tax relief is very often available on the portion of health expenses that our insurer won’t cover.

For example, say that you had physiotherapy for an injury at a cost of €300, and your private health insurance plan only covers physiotherapy up to an annual limit of €200. This leaves you with a bill of €100. But the good news is you may be entitled to tax relief on this €100. If you’ve already gone to the bother of getting all your receipts together, why not make that second claim? (Of course you can’t claim tax relief on medical expenses already reimbursed by your insurer).

PRELIMINARY PUZZLER

As if totting up your tax bill wasn’t tricky enough, calculating your preliminary payment got a whole lot more complicated this year. This is thanks to the universal social charge (USC) which replaced both the income levy and the health contribution in January 2011.

If you are using the 100 per cent rule (ie, you base your 2011 preliminary tax payment on 100 per cent of your 2010 liability), then your calculation must be done as if the USC had been payable in 2010, rather than the income levy and health contribution. In other words you have to work out how much USC would have been due if it had been in place last year.

If just reading this paragraph has made your head ache, then it’s probably best to enlist the help of a qualified tax adviser and leave the number-crunching in their capable hands.

CAN’T PAY, WON’T PAY?

You’ve done the sums 1,000 times over but you just can’t make it add up – whatever way you look at it, your bank balance won’t stretch to cover your tax bill this year. The worst mistake you can make at this stage is to bury your head in the sand and hope the Revenue will forget you exist.

The Revenue’s job is to keep taxpayers toeing the line, but the authority realises that a little bit of common sense is needed at a time like this when so many businesses and individuals are struggling to make ends meet.

“Our approach is tempered by a concern not to impose undue burdens on taxpayers experiencing temporary cash flow difficulties,” a Revenue spokesman said. “We can, and do, put alternative payment arrangements in place to help customers through difficult periods.”

However if you want the authorities to cut you some slack, you have to contact them at the earliest possible opportunity to let them know that you’re having problems, and be honest about your situation.

More information about the Revenue’s approach to tax payment difficulties can be found at revenue.ie/en/business/running/tax-payment-difficulties.html.

MAKE CERTAIN OF YOUR CERT

If you’re a convert to the Revenue’s snazzy online system, ROS, you’ll know one of its biggest attractions is the extended deadline offered to its users. This year if you pay and file online, the October 31st deadline is pushed out until November 15th.

Don’t let that breathing space lull you into a false sense of security. Technology can be less forgiving than good old-fashioned pen and paper so don’t leave everything until the 11th hour.

If you haven’t already done so, now is the time to check that you haven’t forgotten your ROS log-in details. Also make sure your ROS certificate is still installed on your computer and that it’s working.

If you’ve changed computer in the last year or if, like Pricewatch, your laptop’s hard drive had to be wiped after a virus attack, then you may have lost your old ROS cert and will have to request that Revenue revoke it and issue a new one, a process that can take eight working days.