Jill Kerby

Taxing issue of my wife's adult dependant payment

CC writes from Dublin: I receive the Contributory Old Age Pension. I also receive the increase for a Qualified Adult (my wife).

On 15/03/2008 in Document SW118, the Dept. of Social Protection stated as follows: "From 24th September 2007, by law we must pay the Increase for a Qualified Adult directly to the spouse or partner concerned unless the qualified adult wants to have someone else collect it for them". From this it appears that the Increase for the Qualified Adult forms part of the income for income tax purposes of the Qualified Adult (spouse or partner).

Can you confirm that this is correct? The answer to this question is important in calculating our Rate 1 Band (taxed at 20%) and, therefore, the amount of income tax we must pay. We are assessed jointly for income tax. 

The increased payment may be paid directly to your wife, but it is considered, for tax purposes, as the income of the Contributory Old Age pension recipient under their PPS number.

How your income tax is calculated is complicated and you have not furnished me with any figures, but I am going to assume that the reason you are asking this question is because you have received a letter from the Revenue suggesting that you have underpaid your income tax.

If there is an underpayment, it hasn’t been triggered by your €11,976 contributory payment plus your wife’s €10,728 which amounts to less than the €36,000 tax free income you can earn as a married, pensioner couple over age 66 but under age 80.

Instead, an underpayment may have occurred if your total income from all sources exceeds this tax free threshold any you were treating your wife’s payment as her own income under the tax individualisation rules for married couple.

Couples in which both partners are earners, enjoy a standard rate tax rate of 20% on income up to €65,600 with any balance subject to 41% tax. Income of up a maximum of €41,800 can be transferred between the working spouses, subject to the lower earning spouse declaring income of at least €23,800.

If, however you are a single income couple, as you appear to be, the first €41,800 of income will be taxable at the standard rate of 20% and any balance at 41%. If you have assumed in the past that your wife’s Qualified Adult payment of €10,728 allowed your joint income to be treated under the married couple, two earner tax band arrangement, you may have underpaid your taxes. 

I suggest you speak to a good independent tax advisor or your Revenue Inspector of Taxes to establish exactly your correct band and tax liability.

DO’C writes from Wexford: I am a 57, a married man and have been in receipt of a monthly payment from an income continuance scheme for ten years. This is paid by an insurer and is administered through my former employer. I am also in receipt of a social welfare invalidity pension including a payment for my wife.

My contribution rate for PRSI is class A1 but I have been advised by the wages clerk with my former employer that he thinks that I should be on class M. My understanding is that this would offer me a considerable saving but would this be in my interest or would it leave me at a disadvantage regarding my contributions towards the old age pension?

Also, is it possible to have part of my invalidity pension paid to my wife so that she would then be entitled to a PAYE tax credit?

I’ll answer your last question first. A spokesperson for the Department of Social Protection said that in exceptional cases, they have paid part of social welfare payments, to the recipient’s spouse, giving the example of a chronic alcoholic. The Department can also pay the invalidity pension allowance you receive for your wife to her directly, if you agree.

However, the current PAYE tax credit of €1,650 is only available to each spouse or partner in a marriage or civil partnership if both pay PAYE on their earnings. If your wife has no independent earned income – a portion of your pension is not her income, it is still yours - she is not entitled to the tax credit.

Class M is the PRSI band for occupational pension recipients who no longer make PRSI payments. The wages clerk is correct in saying that you would save money transferring to this band but if you want to ensure that you receive a state contributory pension at age 65, you may need to keep paying your PRSI contributions on the Class A1 band, depending on how many you have already accumulated.  You can check the number of contributions you will need on this latest DSP brochure:  http://www.welfare.ie/EN/Publications/SW14/sw14_jul11/Documents/sw14_jul11.pdf

 
KH writes from Dublin:  My wife and family will be emigrating to the US this summer. We have lump sum of €10,000 that we want to convert to dollars to secure the current interest rate (though with it climbing, it might be best to wait and see).
 
The problem we’re having is the best way to set this up. Should we just get cash (though I think we will be limited on the amount we can bring into the US) or a US bank draft or traveller’s cheques? (Are they even used anymore?) Would we need to declare it? Should we get a dollar bank account here, which would then have to be converted back into euro if we encashed it to bring it to the US, thus losing the benefit of the hedging? We can’t open a bank account on the other side until we get a US address.

The advent of electronic banking means that you can eliminate most of the transfer methods you’ve mentioned and their associated risks –like losing the bank draft or traveller’s cheque (the latter can be replaced at another cost), or carrying the cash safely through the airports and perhaps having to explain its presence to the nosy security or custom’s officials.

So first, open a US dollar account in your own bank and convert the €10,000 into dollars, locking in the favourable euro/dollar exchange rate, on whatever date you wish. There will be a currency exchange transaction cost but you may earn a little interest on your dollar account until you are ready to electronically transfer it to your new bank account in the States. NIB told me that the electronic transfer cost of the equivalent of €10,000 in dollars to a US dollar account would be just €10.

The transfer of a sum this size shouldn’t cause you any difficulties, the NIB official said, once you have satisfied your new bank’s money laundering terms and conditions and alert them to the date of the cash transfer.

Insolvency law designed to help creditors, not borrowers

The draft Personal Insolvency Bill, published last week, has raised more questions than it has answered, especially about the extent of the power of the banks to veto debt write-downs that are at the core of the non-judicial personal insolvency options.

Some parts of the new bill seem very lenient, like the way Debt Relief Certificates will allow the swift writing off of up to €20,000 of unsecured debt held by people with no assets and no income. Will there be a surge of arrears now from others, perhaps with impaired credit records, who will only see the upside of letting the arrears build up on their high cost credit card bills or car loans?

There’s also the question of how much the new Insolvency Agency is going to cost. Their job will be to that will administer the new scheme, recruit, train and supervise the army of accountants, lawyers and financial advisors who will become personal insolvency trustees. No funding provision was made in Budget 2012, and no one seems to know how many billions in personal debt – especially unsecured debt, could end up being re-scheduled or written off.

The Minister for Justice has at least admitted that he’s only guessing when he suggested that in year one (probably starting this time next year) only three or four thousand debtors will apply for Debt Settlement Certificates.  The same number, he said will be made bankrupt, and just 10,000 are likely to opt for the two non-judicial insolvency measures, the Debt Settlement and Personal Insolvency Arrangements.

These numbers seem very low. Perhaps the Minister isn’t fully aware of the known size of the problem, as determined by the Central Bank.

As of last September, 62,900 homeowners were in arrears of more than 90 days. Fifty percent of another 70,000 whose mortgages were restructured and have only been paying interest off, are in arrears of up to, or more than 90 days. These numbers will be higher when the fourth quarter statistics for 2011 are published.

Meanwhile, the non-judicial insolvency options are being touted by the government as a way for debtors with serious arrears and negative equity to keep living in their family homes and avoiding the stigma of personal bankruptcy. 

But where is the evidence that this is what the majority of insolvent homeowners really want?

Their desire to keep their homes, no matter what, may have been there at one time, but rising taxation, reduced services and the relentless rise of negative equity and arrears as property prices keep falling will eat away at anyone’s resolve, especially if they now regret buying at such an inflated price and perhaps in an unsuitable location?

Under these circumstances wouldn’t it be worth finding out how many how many insolvent homeowners will be willing or able to endure five or six years of personal financial trusteeship

Even the new bankruptcy option for those who have no chance of salvaging their home or other valuable assets, seems too harsh compared to the process in Northern Ireland and the UK mainland where personal bankruptcy can be discharged in a year to 18 months rather than the proposed three years here.

A couple I know who have opted for UK bankruptcy told me last Wednesday that even if they could go bankrupt “back home” tomorrow, or take up the Personal Insolvency Arrangement option that might let them keep their family home, they wouldn’t.

“We’ve been through three years of hell already, pleading, then fighting with the banks; hiding from bill collectors and the sheriff’s men; juggling bills and avoiding answering the doorbell and phone. We simply couldn’t bear another three, let alone five or six years of it. We only have another year to go [before discharge]. We’ll have to start from scratch again, but we can start living.”

Surely if the government really wanted to “assist those in unexpected difficulties as a result of the current fiscal, economic and employment conditions” they’d create a process that is as simple and compassionate as possible for the private debtor, and as fair as possible for the creditors.  Templates just like these have been in place for years in Britain.

Instead, what we seem to be getting is legislation designed mainly to protect the still loss-making but apparently well capitalised Irish banks, from the effects of tens of thousands of their customers, all seeking debt forgiveness and write-downs at once.

The order of the day, on so many fronts, seems to be to allow the great Irish debt crisis drag on interminably.

Oz is bubbling up

Will red-hot property markets in Australia and Canada end up burning some of our recent émigrés?

The Irish have favoured Australia as an emigration destination for many decades and Canada in more recent years, but just because their banking systems and employment numbers have held up, doesn’t mean they’re immune to the property bubbles that brought down our own economy and has devastated European banks.

Both are now experiencing small but steady nation-wide declines since the financial crisis began in 2007.

Since 1988, and the resurrection of a generous first time buyers grant scheme, property ownership in Australia has soared, reports MoneyWeek magazine. 

Between then and 2000, interest rates halved from a whopping 14% to 7%, which was a very good thing, but the amount of interest also doubled in proportion to their average Australian’s disposable income.

Then in 2001, after the dot-com bust scare and 9/11, the Aussie government doubled the grant and just as happened here, interest rates fell as central banks intervened bring down the cost of borrowing.

The expanding bubble has wobbled several times since 2008, but survived. 

According to MoneyWeek, “Australian home loan debt has soared to more than 85% of GDP. The debt now equates to 130% of household income: five times the 1988 level.” 

In 2011, prices dropped 3.7% and while many Australians are reported to be in denial about how vulnerable they are to a slowdown in China, their single biggest customer for their mineral wealth, the strong Aussie dollar and higher interest rates, a leading US analyst, Jordan Wirst is predicting residential property prices will fall by 60% or more over the next five years.

Hopefully our émigrés can recognize a bubble market when they see one, even in a Lucky Country. 

TAX FACTS EVERY PENSIONER SHOULD KNOW

Is there a single pensioner left in this country who is still unaware that they are obliged to pay income tax on any income in excess of €18,000 or €36,000 for a pensioner couple?

I rather doubt it, given the size of the furore and media attention since the Revenue Commissioner’s mail shot of the 150,000 pensioners who they picked out for special attention between November and January of this year, having received the 560,000 files of state pensioner beneficiaries from the Department of Social Protection.

This was the first time that these two, big money agencies of the state – one that hands out tens of billions of euro and the other that collects hundreds of billions decided to share their data.

The mailshot was an effort to update tax credits and bands, identify underpayments and overpayments, based on the social welfare income benefits listed by the DPS.

Unfortunately, this perfectly legitimate action – everyone is liable to taxation if they earn over the designated tax free limits, regardless of age - but the extraordinary level of incorrect data and the complicated and even contradictory language in the letters (which professional tax advisors even said they had trouble understanding) turned the event into a fiasco.

A private accountancy practise that produced this kind of result  “would have seen heads rolling or put up on spikes outside their offices, something that has happened before at Dublin Castle when the moat was still running and tax collectors were in the employ of the King,” one accountant told me.

That said, Lettergate has still done everyone a service, no matter how cack-handed the delivery:  we are probably all more aware of both our own responsibilities regarding tax compliance and what we should do if there is some question over your liability.

For pensioners, there are a number of basic tax facts to which they should make themselves familiar:

-       Any pensioner whose sole income is their state pension of just under €12,000 or €24,000 is exempt from income tax, the universal social charge (USC) and should not have received one of the Revenue letters.

-       Pension income – whether from a private company or the state or from an Approved Retirement Fund (ARF) is not subject to the PRSI contribution.

-       All income, that is, earned income whether from individual or multiple pensions, including those pensions (private or state) that a pensioner earned from working abroad in the past; rental income (except income from the Rent a Room Scheme); dividend income from shares and interest on deposits is subject to tax if it collectively exceeds the tax-free threshold of €18,000 for an individual or €36,000 for a married couple.

-       If you exceed these tax free amounts, income tax at the higher, marginal  rate of 41% will apply. Capital Gains Tax of 30% may also be payable on share dividends, over and above your annual €1,270 CGT deduction,. Meanwhile, double tax agreements and any tax credit refunds you receive may reduce or eliminate the amount of tax you pay.

-       Pensioners over age 65, whose income falls under the €18,000/€36,000 tax free thresholds, are not subject to automatic 30% deposit interest retention (DIRT) tax and can ask their bank to help them inform Revenue that the usual DIRT deduction at source does not apply in their case.

-       Like the state pension, deposit income is also exempt from USC. Income that exceeds the tax free thresholds is only subject to a total 4% USC, not the 7% or 10% that applies to other earners.

-       Some pensioners may have inadvertently tipped over their tax free threshold by receiving, say, from age 80, the extra state pension age allowance, and this would have resulted in getting the Revenue letter. In such a case, the tax liability will most likely be tiny, even though it is payable at 41% (their exempt income being considered income exempt from the standard 20% liability).

-       Everyone, even pensioners, are entitled under Capital Acquisition Tax rules to receive or give a gift of up to €3,000 year without any obligation to report the gift to the Revenue. 

-       Finally, pensioners with foreign occupational or state pensions, that may or may not be already taxed at source are obliged to file an annual tax return. Pensioners who may have rental and dividend income, for example, that, even when added to their pension income does not exceed the tax-free thresholds, are obliged to file an annual tax return. The information on their return will allow the Revenue to determine their correct tax credits, tax bands and universal social charge, where applicable. 

-       A tax return can also be used to claim tax refunds (if you haven’t done so already during the year by communicating directly with the very helpful Revenue refund office) on medical or dental expenses, for example.

Sorting out your taxes may not be the most enjoyable job you have to do, but it is a necessary one, especially now that every available bit of tax income is necessary to keep the ship of state from sinking entirely.

If you still have questions about the Revenue letter you received, or about whether you are paying the correct tax, contact your Inspector of taxes or a good, independent tax advisor. Then rest easily that you have done your duty and have no reason for any further worry.

I need the best route out of my freeway SSIA fund

NH writes from Dublin: I contributed €254 per month into an SSIA (Special Saving Investment Account) which I did not cash when the scheme ended. In fact, I put more into the fund, the Quinn-Life Euro Freeway fund, which is now well down from its heights. The value is now less than the amount I’ve put in.

 In light of ongoing problems with the Quinn Group, albeit not, they say, with Quinn-Life – they say this fund is “ring-fenced” and completely safe - do you think it would be better to cut my losses and cash-in?

 I am, thankfully, not in pressing need of cash right now and would be happy to leave things as they are in the hope that they may come good eventually: the niggling fear is that I may lose all if Quinn-Life collapsed.

Quinn-Life is still owned by the Quinn Group and is neither for sale, nor in any danger of ‘collapse’, said a spokesman for the company. However, there is no compensation scheme for life assurance investment holders (unless you are a customer of Standard Life, which comes under the UK investment compensation scheme.)  If Quinn-Life were to collapse you could lose all or some of your investment.

As to whether you should encash your fund or not, this is something you should decide upon only after weighing up the actual loss: Quinn-Life’s website shows that the Euro-Freeway fund has lost -36.8% over the past five years, the period in which you have increasing your contribution to the fund. However, during the previous five years of the SSIA scheme, 25% of all your contributions were a gift from the state, and the fund produced a positive return. Also, if you do encash right now there won’t be an exit tax to pay if there is a loss, but because it is a life assurance investment and not say, an equivalent exchange traded fund (ETF) that trades directly on the stock market, you won’t be able to carry forward your losses to mitigate other capital gains tax liabilities.

Instead of crystalising your losses – you admit you don’t need the money and “things might come good some day” – you could consider a free switch to a different Quinn-Life fund.

Past performance is just that, but over the same five year period to 13 January, 2012, since you started adding more money to the Euro-Freeway fund, to 13 January this year, the Biotech Freeway fund produced a cumulative gross return of +58.3%, the Latin American Freeway Fund, +39.9% and the Technology Freeway fund, +25.2%. Only the Celtic Freeway fund, at -64.4% produced even worse returns than the Euro-Freeway.

MG writes from Dublin: Is it possible for a parent to loan his son money to clear his mortgage without the son incurring a tax liability?

There is a lifetime tax-free gift threshold between a parent and child that is currently €250,000 before any capital acquisition tax of 30% must be paid.  So long as your son’s mortgage is below this amount, and he has not received a previous gift that would be liable to CAT, he will have no tax liability to pay.

PM writes from Dublin: My brother-in-law, 65, is an citizen and resident of Ireland and has been advised by the UK state pension fund of his British pension entitlement as he worked for a few years in the UK. They also advised him that he could practically double his pension by making a payment to cover some missing years of contributions. If he does this, the pension his wife receives will also be increased though she never worked in the UK. He has a small pension fund currently invested with Acorn Life Galway which he intends to continue as he will need to carry on working for the foreseeable future.  He would like to use part of his Acorn pension fund to finance the amount required to enhance his UK pension. To avoid any tax complications Acorn will need to make payment direct to the UK State Pension Fund.  This appears to be covered under the Revenue rules, however Acorn are dragging their feet. Perhaps this is the first time they have come across this opportunity. Is it possible for you to confirm whether it is acceptable to make such a transfer as envisaged above?

According to pension consultant Clive Slattery of Friends First, a former senior Revenue pension official, there is no Irish Revenue rule that allows a private pension fund holder to part-encash their fund or for their pension provider to do so in order to transfer the money to the UK state pension fund in order to purchase an enhanced state pension payment (the latter of which is possible in the UK.)

The financial advisor and pensioner trustee Eddie Hobbs of FDM Ltd added, “Perhaps your reader is confusing this idea with the 25% of his pension fund that he can take tax-free, that he might then be able to pay to the UK state pension authorities to enhance his and his wife’s pension benefit.”

Your brother-in-law needs to speak to his Acorn Life representative again or write to the company for clarification on this matter.  Given his confusion over what is possible, he should also consider engaging an independent pension advisor when dealing with Acorn, who could also help him decide what to do with the remainder of his pension fund if he does use the tax free portion to buy additional UK state pension benefits.

Billion euro mess-up in the credit unions

Where is that €1 billion of taxpayer’s money when you need it, credit union officials all over the country must be asking this week after the Central Bank sent a ’special manager’ in to run the Newbridge Credit Union and is expected to do the same to at least 20 others.

The Minister for Finance has set aside €250 million to pump into struggling CUs this year and next, but the total bill is expected to be about €1 billion, he said last October, as bad CU debts balloon to at least amount.

Since all the previous estimates of bad debts in the industry have been incorrect, it’s hard to imagine that the final bailout bill for the credit unions will match this prediction. Bad debts, especially those linked to property loans are a moveable feast in this falling market, as anyone in Nama can attest. 

Many credit unions are in trouble not just because members have lost their jobs; too many of the unions permitted members to borrow towards the purchase of property that is now worth a fraction of the original cost. They also allowed, for too long, old loans to keep rolling over rather than seek the repayment of the capital and the part-time and amateur financiers on the boards of some unions made poor investment decisions with their surpluses. To their horror this money then disappeared as the leveraged property deals in which they were invested collapsed in the post-2008 crash.

Poor lending practices and inappropriate investments – the same events that brought down our once-prudent high street banks – has caused this credit union crisis.  Yet I couldn’t help but laugh last week when I heard anonymous credit union ex-officials on the radio, insisting that their troubles began and ended when the Central Bank came poking their nose into their business, weighing them down with layers of new lending rules and regulation.

The Central Bank has a lot to answer for, including facilitating the political decision to bailout our bankrupt banks, but tightening up the prudential and compliance rules under which all financial institutions must trade, isn’t one of them.

Meanwhile, it’s worth remembering that credit union deposits up to €100,000 come under the state government deposit guarantee scheme, but as with the banks, you don’t want to leave your money with a credit union that is insolvent, even if the taxpayer gets stiffed picking up the tab to cover your deposit.

Read the annual report. Attend the AGM. Find out for yourself if it is a safe place to leave your money.  Demand that your CU officials proactively correct the failings of the organisation, and if they don’t, withdraw your funds and vote with your feet.

Pensioner power

Tax compliant pensioners are justifiably annoyed about being included in the Revenue Commissioner’s recent and badly organised 115,000 strong mail shot to retirees whom they claimed owed more tax than their newly expanded records – care of the Department of Social Protection – suggested they were paying.

The fallout from this hastily organised data trawl between last November and 1 January has been well reported, but the angry and very public reaction by pensioners who knew they were fully compliant and were incorrectly targeted was heartening. 

Tens of thousands who got the letters complained to their public representatives, to local Revenue and Citizen’s Information offices, to Age Action, the Senior’s Parliament and to the media. This pressure eventually forced an apology for the cock-up from the senior Commissioner Josephine Fehilly when she appeared before an Oireachtas committee.

Would such an outcome have happened in the UK, where a 2010 report of the British parliament’s Public Accounts Committee suggested that pensioners are not very well treated by their tax authorities either?

That report has some sober warnings for us. The committee found that despite being considered the most tax compliant cohort in the UK (as they are here) 1.5 UK pensioners had overpaid £250 million in tax because of the discrepancies between HMRC’s records and the records of employers and pension providers. 

HMRC’s systems, it found, were incapable of easily dealing with the multiple sources of pensioners’ incomes. Sound familiar? 

The furore over the Revenue’s latest tax trawling exercise may have died down, but the mountain of data they received from the DSP will take a lot longer than two months to revisit properly this time.

The parliamentary committee made several recommendations in their report to improve the tax service to pensioners, including how to make it less daunting for an estimated 2.4 million people to collect £200 million of deposit interest refunds, but the National Audit Office subsequently predicted that with 20 million tax codes still unmatched in the UK, the system changes would take many years.

Pensioner tax discrepancies may or may not be as great here, but the UK experience sounds like an endorsement for hiring an independent tax advisor to deal with Revenue if there is any suggestion that you owe them money… or better still, if they owe you any.

Shining example

Counterfeiting is declining, report Central Bank, fell by 19.3% in 2011 compared to 2010.  Is this because the ECB is now so enthusiastically counterfeiting the currency itself – adding as it did €500 billion to the money supply in order to provide eurozone banks with a lending facility last De ember of last resort?

 The only other reason I can think that there would be such a huge drop in dodgy €20 and €50 notes (always the biggest sellers) being printed by the ODC’s –the ordinary decent criminals of the black financial economy, is that they’re also beginning to write off the euro as a credible, or even medium form of money.

 I mean, who would want to get stuck with a pile of dodgy euro if the balloon went up and we all reverted back to our old familiar punts, drachma, lira and peso? 

 Happily for gold and silver buyers, modern day counterfeiters, whether in the lofty halls of the ECB or in some damp garage, still haven’t worked out how to duplicate precious metals, which explains why both their value and sales keep rising.

Part 2:  Use all the help you can get to achieve Budget savings, success

A family of five – two working parents, three children, one of whom is about to go to college – with a joint after-tax income of just €48,860 could easily join the legion of similar families in Ireland today who are struggling on far less to house, feed, clothe, educate and provide a modicum of entertainment in today’s austere Ireland.

The problem is that modern life, with it’s middle class expectations for 21st century conveniences – from the instant and flawless delivery of everything from heat and lights, the internet and the world wide web information to advanced medical care and services – doesn’t come cheap, especially when the wealth of the nation has collapsed along with cheap credit and plentiful employment.

In last week’s column, I identified the huge costs that our typical family are faced with as they also struggle to control their mortgage, credit card and personal debt.

The following is the list of their main expenditure and my suggestions about how they can find better value, bring down or eliminate these costs. Since time is money (or better still, a chunk of your life better spent with the children, friends, garden or hobby) I include my favourite ‘helpers’ who can do much of the slog work for you.  As I explain in the budget chapter in my TAB Guide to Money Pensions & Tax 20112, all you really need is a little budget ledger nearby to keep track of the steady savings you can achieve:

MORTGAGE/RENT:  Often the first of second greatest expense (with groceries sharing that rank) everyone should review their mortgage interest, tax relief, especially in light of the 2012 Budget relief changes.  A sure fire way for renters to save money is to move to a cheaper neighbourhood/property. €100 less rent is €1200 a year; €200 is €2400 – on what might be the same size house.  Mortgage holders who are having trouble meeting their repayments should do their budget (with or without the help of MABS), then meet their lender and work out an adjusted repayment schedule. Interest only payments will reduce most monthly repayments by about a quarter: for anyone with a €1000 a month mortgage payment this equates to a with a typical monthly payment reduction of about 250 or €3,000 a year. Also, if you qualify as a post January 2004-2008 first time buyer that you claim the new 30% tax relief (instead of falling rates of 25%-20%) on your interest paid from the Revenue at www.revenue.ie/en/online/mortgage-interest-relief.html or on the TRS helpline 1890-46 36 26 .

FOOD/GROCERIES:  Keep all food/beverage receipts and monitor your spending. Aim to cut 10% out of the overall budget for 2012 if you haven’t already, which can usually be done by eliminating ‘treats’ – crisps, fizzy drinks, alcohol, chocolate bars, one in ten takeaways, lunches, restaurants and food waste.  With a typical working family grocery bill amounting to €200 a week when all extra’s are included (€10,400 a year) a 10% savings here alone amounts to €1,040.

CIGARETTES/ALCOHOL:  One pack of legally purchased cigarettes a day costs c€3,100 a year; alcohol is relatively cheap, but if the government has its way, not for long.  Even a tenner a week saved from your cheap beer, wine or spirits bill is a €520 annual savings, money you will need to pay the new household charge and the additional 2% higher rate VAT on so many other household expenses.

INSURANCE:  Driving a smaller, older car (especially if you are middle aged and live in a ‘safe’ neighbourhood) is a sure-fire way to cut a high motor insurance bill. Aside from that, you need to compare premiums every year. Having spent too much valuable time in past years phoning motor and home insurers, checking their on-line websites, independent sites like www.123.ie and www.theaa.ie and even the National Consumer Agency price comparison site (www.nca.ie), which is useful but not really detailed enough, I have reverted to using a good general insurance broker for my motor/home insurance needs who ensures my cover is up-to-date and competitive. Many brokers will offer a 10% discount on your current premium just by sharing part of their first year commission. The real test is the premium he finds you in year two.

Many health insurance members have already dropped to cheaper plans or put children on basic plans (which is often all they need) yet premiums keep rising. You could go to the health insurance regulator’s site, www.hia.ie to compare plans and premiums, but I find it hugely confusing and time consuming and instead believe that with the insurers playing cat and mouse with each other by bringing out so many new plans to maintain market share, you should engage a broker that specialises in private health insurance. 

Dermot Goode of www.healthinsurancesavings.ie and Roisin Lyons of Lyons Financial Services at www.lyonsfinancial.ie are two well-known specialist brokers who will justify any recommendation against plans available at the three insurers, Aviva Health, Quinn Healthcare and the VHI. They say that typical savings, if you are not already paying the most competitive rate can range from just a couple of hundred euros to as much as €1,000 for long term VHI customers who remained on their popular Plan B plans.

UTILITIES:  Keeping up to date with the changing tariffs and charges for electricity, gas, telephone, internet, television and mobile phone utilities is extremely important but just as frustrating as the search for a competitive health insurance plan.

I use two sites – www.callcosts.ie for mobile phone tariffs (this is because I’ve bundled the home phone in with internet/broadband) and www.bonkers.ie for utilities.  In both cases you need to input your provider scheme and your usage, which is less complicated for heat and light than for the mobile, but the savings is significant. In my own case, I’ve achieved savings of about €400 on my mobile and about €300 on utilities.  Add another €300 savings on my health insurance in 2011 and these three savings amount to  €1,000 for very little work on my part.

Finally, cutting out hobbies, sports memberships, holidays and reducing your Christmas spending are all discretionary purchases that can be reduced.  But are you truly frugal enough? We’ll return to this topic soon, but next week, a 2012 cost/savings plan for Pensioners. 

Pensioners grapple with PRSI and USC challenges

WO’S writes from Co Kerry: As a pensioner, who worked in the UK for 13 years, I qualified for a medical card in Ireland, I was exempt from paying PRSI or health levies on earnings prior to 2011. Since January 2011 I have been subject to USC but I am wondering if it is correct that from January 2012 I will be subject to both PRSI on all income and also to the USC?

The universal social charge (USC) does not apply to any Irish social welfare pension payments (or to any income on which you have paid deposit interest retention tax.)  However, it does apply to any other ‘relevant’ private occupational pension or other private income that exceeds €10,036 per year (€193 per week) whether the pension holder has a medical card or not. The relevant income threshold was raised in the last Budget from the 2011 limits of just €4,004 annual relevant income (€77 per week).

If you are over age 70, and your non-social welfare income, or deposit income qualifies for USC, the first €10,036 of income is taxable at 2% and the remainder at 4%.  Anyone over age 70 with relevant income in excess of €100,000 will pay USC of 7%.

If you are over age 66, all pension income is exempt from PRSI payments.

If you are unsure of your USC or other tax liability, you should have it checked out, either by your inspector of taxes or an independent tax advisor.  Given how many errors have been reported, and how confused they have left so many pensioners’, double-checking all the figures will provide you with peace of mind, if nothing else.

FM writes from Kildare:  My mother signed over a piece of agricultural land with no site value to me several years ago. I am a part-time farmer and have another job. I did some work on this land and spent €30,000 - €40,000 on it.  In 2011 the value of the land is now worth between €10,000-€20,000 more than I spent on it and due to a previous arrangement this sum must be paid to my brother. Is there any tax liability arising out of such a transaction?

You write that the land had no site value, but the Revenue would maintain that every asset has a value, and in the case of a land transfer, the owner – your mother – would be liable to capital gains tax for the original owner if it’s value has increased since they first owned it, and a possible capital acquisition gift or inheritance tax liability to the person who receives it, in this case, you.

Now that you are transferring this land to your brother in the form of a gift, you will need to determine its value when you received it and its current market value. If the price has risen, and it sounds as if has, if only due to the amount you have spent enhancing its value, you may have a capital gains tax liability of 30% to pay on the difference (after taking into account your annual tax free allowance of €1,270).

Depending on whether the land is worth more than €33,208, the tax-free threshold between siblings, your brother may have a CAT liability on the difference, also taxed now at 30%. (The CAT limit between a parent and child when the land was first transferred to you was approximately €500,000; today it is just half that sum.)

I suggest you speak to a tax advisor or your Revenue inspector or taxes about any potential liability this piece of land has raised for you and your relatives.

DK writes from Co Donegal: A few months ago I switched €50,000 to Australian dollars. My questions are, in the event of a euro breakup, Irish sovereign default or our reverting to an Irish currency, with any of these three events resulting in an Irish default of say 30% or 40% devaluation in the currency, how safe would my Australian dollars be from devaluation? What control would the Irish government and EU have over my dollars? Would I be better with my savings in a bank and currency totally outside the eurozone and finally, what effect would a devaluation like this have on new car prices in Ireland?

None of the Irish banks are able to predict what will happen to foreign currency deposit accounts in the event that Ireland were to revert to its own currency, presumably, the new punt. However, there is plenty of evidence to suggest that when a currency defaults – the depegging of the Argentine peso from the US dollar in 2002 is such an example – the new currency is usually devalued quite soon to boost exports and economic growth. Such would be likely to happen here as well. Again, no one can say how a non-Irish bank, especially one operating outside the eurozone would respond to such a ruling by the Irish Central Bank.

If you are concerned about the risk of our leaving the euro, you are perfectly entitled to move your euro or non-euro currency savings to another EU or non EU jurisdiction, subject to the terms and conditions set by the particular deposit institution.  Only you can decide whether the extra costs involved and the currency exchange risk is worthwhile.  You must also inform the Revenue of you offshore account in an annual tax return and pay Irish DIRT or income tax on any interest you earn, where applicable. 

Finally, if we go off the euro and back onto the punt which is then devalued, all imports, including cars will be much more expensive, at least until our economy recovers and our currency strengthens.

Mailshot not a red-letter day in the history of the Revenue

Revenue’s handling of Lettergate was properly excoriated by the Oireachtas committee members in front of whom the head of the Commissioners, Josephine Feehily appeared last week.

The purpose of this vast mail shot was spot on:  to make sure every pensioner in receipt of a state pension was paying their correct share of tax.

How anyone in the Revenue thought it was a good idea to take 560,000 files sent to them in November by the Department of Social Insurance and whittle those down to just 115,000 letters with some probability of underpayment by 1 January – a mere six week period that also included the Christmas/New Year break - is mind-boggling.

Any public relations junior could have told them that it might be better to start with  a smaller number of letters – say, the 2,500 to pensioners earning €50,000 or more whom the Revenue suspect owe them money and then only after they’d double and treble checked the figures to ensure that all the date being sent out correct and up-to-date. 

Instead, letters that were riddled with errors and out-of-date data were sent out, by their own admission, to the most tax compliant group of taxpayers in the country, who quickly made their disquiet known to the Revenue, their own tax advisors where applicable, their TDs and especially to Joe Duffy’s Liveline Show.  

It will take a little time for the Revenue to regain their reputation after this own goal, a reputation for toughness but that has been pretty exemplary in recent years and pretty much restored after the huge deposit account/amnesty scandals of 20 years ago.

Compared to their equivalents in some of the other PIIGS countries, especially Greece, our tax collectors are mostly seen as doing a difficult job efficiently, honestly and cost effectively, which is no less than any of us should expect from such key officials of the state.

However, the part of this story that has been lost in the headlines about angry pensioners is that this is the start of a change that should have happened decades ago:  the joined-up reporting and sharing of information between government departments and agencies.

Not only will the Revenue be updating our tax returns with the pension division of the Department of Social Protection in the future, but with the division that pays out unemployment benefits, the €550 million paid out every year for rent and mortgage supplements and the most controversial tax-free, universal payment of them all - child benefit.

The introduction of the PAYE system displaced – up to now – the need for most workers to file an annual tax return, but with about half the population in receipt of some state benefit, and the self-assessment system increasingly less reliable as the economy implodes, the re-introduction of universal tax returns is surely not faraway.

The Revenue’s resources will certainly have to be bulked up to accommodate that surge in tax reporting, but it would be fantastic news for tax advisors and accountants and for a company with which I first became familiar as a college student with part-time jobs many decades ago:  the ubiquitous H&R Block.

Set up in 1955, it has 22 million customers in the US, Canada, Australia and the UK and while it has expanded its services, its core business is still helping people, for a modest fee, fill out their annual tax return, mostly on-line.

Insolvent abuse

The bankruptcy proceedings against the former billionaire Sean Quinn doesn’t interest me as much as how closer our legislators are to producing the new bankruptcy legislation that will apply to the ordinary people of Ireland, who can’t pay their bills.

The tens of thousands of shop owners, service provider and mortgaged home owners who are now insolvent due to the economic collapse of this state – helped in many cases by their own over enthusiastic borrowing and the encouragement of their lender – deserve far more attention and sympathy than the likes of Sean Quinn and his fellow mega-bankruptcy tourists, most of them property developers, who owe billions to their creditors.

The numbers of mortgage holders who are theoretically insolvent and who could be forced into bankruptcy by their creditor, their mortgage lender, probably includes just about every homeowner in serious arrears.  Since that number is now accepted to be at least in the region of €100,000, realistic bankruptcy legislation should be the top priority for this new Dail term.

How any system will cope with the flood of applicants who genuinely cannot sustain their mortgages, is another problem that no one seems to want to acknowledge.

Class struggle

The 400 householders in Terenure West in Dublin who are seeking the redrawing of their constituency boundary may want to consider what impact, if any, it might have on their property values.

Once upon a time, a favourably amended postcode was believed to be a sure-fire way to increase the selling price of your house; now, with a property tax on its way that might take into account the site value, market value, square footage, or perhaps a combination of all three factors, artificially ‘upgrading’ your neighbourhood may not be in your financial interests.

The Terenure 400 believe their political interests are more in sync with those who live just across the road within the Dublin South East constituency that includes Ranelagh and Rathmines, Donnybrook and Ballsbridge and are represented by the smoked salmon socialist Ruari Quinn and Fine Gael’s Lucinda Creighton.

Meanwhile, Dublin South Central, in which this corner of leafy Terenure is included, along with Drimnagh, Crumlin, Ballyfermot and Inchicore is predominantly working class and includes Sinn Fein deputy Aonghus O’Snodaigh and People Before Profit’s Joan Collins.

Until it is decided how the upcoming property tax will be assessed – either as a site tax, a market value tax, one based on square footage or a combination of all three – these householders might want to hold their fire to see if constituency lines play any part in the way the new tax is assessed.

In our property-apartheid culture, my guess is that a pleasant three bed Edwardian terrace in Terenure/Dublin South East will always command a higher property price – and tax - than the same terraced house in Terenure/Dublin South Central.

PART 1:  NEED A 2012 FAMILY BUDGET?  HERE’S WHERE TO START

How much more money will you be paying for groceries, heat and light, petrol and other motoring or transport expenses in 2012? How much will your health costs rise by, especially if you want to keep your private health insurance or have expensive monthly drug requirements?

How much do you think the rise in VAT will cost you in total this year - another €200?  €500?  €1000?  And how can you get your debts under control, when all these extra expenses are making claims against your finite income or savings?

There are only two ways to make a budget balance – by earning more or spending less. And if this great recession lasts as long as many independent commentators suggest that it will – and it will only end when we reduce our great debt burden and by selling more goods and services to the rest of the world and to each other – then everyone should be dusting off their CV’s, improving and extending their skills, and doing their utmost to earn more income.

Where the latter isn’t likely – and official unemployment is now 14.3%, partly due to the fact that in so many sectors our pay is still too high relative to our near and global competitors – then the only other way to make your budget balance is to cut back on your spending.

Let’s start with the income and expenditure challenges of an ordinary working family with three children, one of whom is now 18, no longer in receipt of child benefit and will start college later this year. (The assumptions I make are based on those provided by a myriad of sources – utility companies, insurers, mortgage providers, the National Consumer Agency, pollsters and others.)

This family’s income is €41,500 for the father and €23,500 for the mother who works part-time (these figures produce maximum tax individualisation benefits) and this relatively modest, middle earning family will also receive an annual tax-free child benefit (CB) payment of €3,360 (instead of €5,136 in 2011) for their two children.

Their total gross income is €65,000 but PAYE (@20%), PRSI and the universal social charge will reduce it by nearly €19,500 to €45,500. Add child benefit and their basic, net disposable earnings will be €48,860. They will pay over 30% of their combined earnings to the state, about €1,500 more in 2011 than in 2,010 due mainly to USC. 

They already made up for the loss of the third child benefit by getting rid of their second car, but with just €4,070 a month to spend, 2012 is going to be a huge challenge.

First, their mortgage is €1,000 a month – plus another €29 (€350 a year) for home insurance and €25 a month (or €300 p/a) for joint life mortgage protection. The family now has just €3,015 left for food, clothing, insurance, utilities, motor costs, the education of the three children, holidays, etc.

Their monthly food budget is €866. The cost of heat and light for their typical, seven year old semi-detached house (outside Dublin) is approximately €1,800 a year for both gas and electricity or €150 per month. Their combined TV, phone and broadband package is another €850 a year or nearly €71 a month. The cost of their three mobile phone packages is €1,200 a year or €100 a month. Health insurance is a huge cost for this family of five. Their current family plan is c€250 a month or €3,000 per annum.

Their monthly disposable income is now reduced to €1578 and will fall by another €8.33 a month once they pay the €100 household charge on 31 March.

Next, motor costs. Their older, paid off car includes annual insurance (€400), the higher 2012 tax rate (€478), petrol (€2,600), maintenance (€250) and this year’s NCT (€50). When the extra 2% VAT is added, their minimum monthly motor costs will be €321. Disposable monthly income is now just under €1,250.

This family will spend at least €125 a month (€1,500) on the children’s school uniforms, footwear, books and school donation; annualised bus fares will cost another €75 per month (€900).

Clothing, doctor’s visits, holidays, Christmas, entertainment, birthdays and other anniversaries, and any emergencies must be met from their remaining €1,050 disposable income.  The 2% VAT increase alone will cost them another €500 a year, according to estimates by consulants Ernst & Young.

Their remaining monthly income is simply not enough to keep up with the bills which is why they now have €3,500 of credit card debt (which now requires a minimum monthly repayment of €175) and they are paying €125 to their credit union for a €5,000 loan they borrowed two years ago for two unexpected household and medical emergencies and to clear a previous credit card bill. (Another €50 is being paid into their share account, a prerequisite of the loan. This €1,200 is their only savings.)

This family isn’t in as much debt as some – the two older children are earning money from baby-sitting and other small part-time jobs. The parents are just about making all their debt repayments – but they are dangerously close to getting into arrears on their utilities some months. They need to make some serious spending cuts if they are to keep their heads above water.

Next week:  How our family got back into the black – a practical guide to making serious household savings.

Warning: don't allow this levy to damage your health

Do you still have private health insurance?  Or are you being forced to join the tens of thousands of VHI, Quinn Healthcare and Aviva Health members who are reverting to the care of the public health service?

The latest 40% health levy increase by the Department of Health to €289 and €95 for adult and child members, certainly isn’t going to slow down that exodus and could play a growing part in the end of the two tier health system in this country.

The purpose of the levy is to subsidise the loss-making VHI, which is fully owned by the Department of Health, so that the state won’t have to provide the €200 billion it is estimated, but doesn’t have, that the VHI needs before it can comply with EU solvency regulations.

I rather doubt any subsidy will restore the VHI to fiscal health.

A private health insurance system like ours, with community rated premiums, (whereby everyone pays the same price for a plan regardless of age) needs a constant stream of younger, healthier members joining in order to meet the benefit promises to older members who make the bulk of claims.

High unemployment, the return of immigration as well as rising premium costs has reversed that stream of new members and the pyramid scheme is beginning to collapse. The higher the government hikes the subsidy for the VHI, the greater it undermines the ability of the private insurers to compete or others to enter the market, and the more precarious the pyramid becomes. 

Since it is still early in the New Year I’m going to make a guess – I don’t believe in predictions.  As the economy continues to contract, private health insurance is going to become the preserve of the wealthy, just like it is in other countries.

Community rating, as it was originally designed, will continue to be undermined by the cherry-picking that all the insurers are now undertaking to minimise their exposure to older, expensive claimants.  It will become irrelevant.

Meanwhile, the Department of Health’s creature, the VHI, complete with its civil service remuneration and pension terms, will be protected and preserved so long as it is in the power of the Department to do so.  In fact, if it was in their power to return the VHI’s monopoly, it would, and the VHI could then be ‘the insurer’ at the heart of Dr O’Reilly’s great plan to introduce Dutch-style universal health insurance here.

Thankfully, this won’t happen…because I’m also going to guess that we will have a very different state, let alone government long before 2016. Universal health insurance will have to wait.

Meanwhile, review your healthcare needs, ideally before your insurance renewal date. Check out www.healthinsurancesavings.ie for policy options.  Consider dropping down to a cheaper plan before you abandon cover altogether. Families may want to at least see if they can afford a HSF health cash plan, to help cover public service outpatient and hospital charges.

Risky business

Dr Peter Bacon, the architect of the National Asset Management Agency (Nama) believes the best way to stabilise the property market is for the government to step in and take on any future price loss incurred by new buyers.

This is what he told RTE radio last week: "If people fear the market is going to fall further then that fear has to be removed and the only way it can be removed is by government assuming that risk."

According to Bacon, "If somebody were to buy a house now at €175,000 and by the end of this year there was a risk that the price was going to fall further, then the only way you will encourage punters back into the market is by the Government assuming that difference."

If the government is stupid enough to take this advice, which could happen given how Nama has already been given the green light to waive 20% of any loss on the purchase of their properties, this could prove a real winner for speculators who know how to pick well positioned properties with decent yields and potential long term growth.

Prices have already more than halved in some areas, and while it would be a gamble, between the hapless taxpayers being forced to pick up a proportion of future losses – and Bacon says the government should make good ANY loss – and a fixed rate mortgage that would be repaid faster once ECB money printing devalues the euro, the speculator could do very well from this latest suggestion for the government to interfere in the necessary correction of the property market.

Will such a deal really inspire enough ordinary people to jump into the still falling market?

Of course not.  Only the prospect of safe long-term employment and a country that isn’t in bankruptcy limbo, will resurrect this market. 

Only the inhabitants of Planet Bacon, where a whole different reality exists, think otherwise.

A waiting game

 I’m all in favour of people paying their bills on time, but as of last Wednesday lunchtime, over 2,100 people had already paid their €100 household charge or had set up direct debits in order to do so by instalment. (The latter deadline is 1 March.)

I will be paying the charge by the end of March deadline – I intend to keep my power dry for the real battle, over the site or market value that the authorities eventually put on my house – but they will get their €100 on 31 March, not before.

With another €1.25 billion of taxpayer’s money (that we don’t have to spare) to be paid by the Government to the former Anglo Irish Bank’s bondholders this month, I prefer to hold onto my money for as long as I can, rather than watch the state squander it sooner, and allegedly in my best interest.