Last Updated on by Tree of Wealth
The season of tax filing is here again!
Here in this article we look at legit ways on how you can reduce them taxes. Here we want to look at 4 good methods that not only can you use them right away to reduce your taxes, but also to grow some wealth. Don’t worry, they are not illegal and you can safely use them without breaking any laws.
You’d be surprised that while there are so many ways to reduce your income tax, why is it that most people still don’t really do it? The real answer is Procrastination.
The window opens on the 1st day of January and the key is not to wait until 31st of December of the year to do this, but rather to plan it wisely and not delay it. After all, if reducing tax is what you are looking at doing, why wait?
For example, your tax bill for the Year of Assessment 2019 (YA 2019) depends on your income, expenditure and deductions calculated from January 1, 2018 to December 31, 2018.
The New Personal Income Tax Relief Cap of $80,000
However, before we dive into them, let’s get a glimpse of the new Personal Income Tax Relief Cap and learn how we calculate our taxes. This will help determine whether these measures for reducing tax are worth our time and effort.
The Personal Income Tax Relief Cap is a recent policy that has been in effect since the Year of Assessment 2018 (YA 2018). It caps the total amount of personal relief a person can claim at $80,000 per YA. This means that if you have already claimed up to $80,000 in tax reliefs, you cannot take any steps to further reduce your tax bill.
Expenses such as Employment Expenses or Cost of Renting Property, donations, and other tax reliefs fall under allowable expenses and are not covered by this cap. The cap actually applies to only personal reliefs.
According to IRAS, most taxpayers are unaffected by the relief cap. However, if you are not sure if you will be affected by this cap or not, you can use of IRAS’ income tax calculator to verify where you stand.
You may discover that taking many steps to maximize your tax deductions may be unnecessary since they do not change your tax bracket significantly.
Two Types of Incomes to Calculate Our Income Tax
This basically refers to the total income you earn. For most people, their assessable income comprises only of the salary they receive from their job. This includes income they might have received from any other freelance, part-time jobs or properties rental income. However, not all the income earned in Singapore is considered assessable income. For instance, winnings from the lottery are not taxable, as are profits you make from stocks or property investments (aka Capital Gains). Below are some examples of Taxable and Non-Taxable Income:
|Taxable Income||Non-Taxable Income|
|Bonus||Winnings from 4Ds and TOTO|
|Employment Salary||CPF LIFE Payouts|
|Properties Rental Income||Profits from Stocks (AKA Capital Gains)|
|Freelance and Part Time Renumeration||Alimonies|
The Chargeable income is usually identified as the total amount that you are to be taxed after a deduction has been made between your personal reliefs and your Assessable Income. The way this works is that as your chargeable income increases, your income tax payable also increases as a percentage of your total income. Also to note, do not confuse Chargeable Income with Assessable Income. The general rule of the thumb is: Chargeable Income = Assessable Income – Personal Relief For a more thorough check, do click on IRAS and check on the specific type of income’s tax rate.
1. Top Up Your CPF Special Account
Saving for retirement is important for everyone and topping up you or your family members’ CPF Special Account (SA) is a great way to save on taxes. This is because for every dollar you contribute through voluntary CPF top-ups, you are eligible for a dollar-for-dollar tax relief on your income tax.
For example, you lower your chargeable income to a maximum of $14,000 per calendar year by contributing $7,000 for yourself and another $7,000 for your loved ones, both of which are cash top ups.
The maximum tax relief cap of $80,000 still applies for this situation, so do take note of that.
The current interest rate that CPF is giving you is at 4% yearly.
On top of that, if the assurance that your money is now invested, backed and guaranteed by the Government regardless of the financial market waves, is not enough to make you feel at peace, we don’t know what will.
2. Take Advantage of the Supplementary Retirement Scheme (SRS)
The Supplementary Retirement Scheme (SRS) is another part of the government’s multi-faceted approach to address the retirement needs of Singaporeans. Unlike the CPF, contributions made to SRS accounts are voluntary and they are also eligible for a dollar-for-dollar tax relief claim. SRS contributions are also capped annually.
The current cap is $15,300 for Singapore citizens and permanent residents, while for foreigners it is set at $35,700. For instance, if you have a taxable income of $60,000, you will save about $1,070 in income tax if you contribute $15,300 to your SRS account.
Contributions made to your SRS account can be used for many purposes like investing, getting retirement plans (insurers with SRS option). Once you reach the current official retirement age of 62, the amount grown inside the SRS account will eventually be able to withdraw. The withdrawals are subjected to a 50% concession as well.
3. Top-Up Your Medisave Account
While CFA SA top ups are a popular way to reduce tax billings, it may come as a surprise to most people that you can also claim tax reliefs for making voluntary contributions to your Medisave account.
As long as you have not reached your Basic Healthcare Sum (BHS), you can claim the tax reliefs contributed to your Medisave account. The BHS for those who turned 65 years in 2018, is $54,500.
The plus side of this is that it not only helps you receive tax reliefs, but also to put the money aside for medical expenses. These include paying premiums for your MediShield Life and integrated shield plan. Interestingly, the money in your Medisave Account also earns you an interest of at least 4% interest per annum.
4. Contributions and Donations To Approved Charity Organisation
When you make donations to an approved Institution of Public Character (IPC) or the Singapore Government for reasons that benefit the local community, those donations are classified as deductible donations. This is on the condition that you do not receive any material benefits, like getting exposure or any other rewards of such.
However, do note that not all registered charities that are approved IPCs. If you make donations to a charity that does not have IPC approval, that donation will not be classified as tax-deductible. You can easily look-up if an organization is IPC approved at the Charity Portal.
The donations contributed to the approved IPC allow you to claim a relief of 250% of the amount that you donated. This is good news for high income earners as this is another way to bring down their chargeable income significantly.
Just make sure you are making tax-deductible donations to approved-charitable organisations.
To be able to claim your tax relief, all donations must be made in the window period of 1 January to 31 December for the year.
Stop thinking too much (that is procrastination), and start exploring the various ways you can actually do to reduce your tax, the legit way of course.
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