Sunday, 15 December 2013

Deciding How Much Tax You Want to Pay

It is the time of the year when you start to see newspaper articles and blog posts extolling the virtues of contributing to the Supplementary Retirement Scheme (SRS). SRS is part of the overall tax planning when you list down your incomes and personal tax reliefs for the year to estimate how much tax you need to pay in the next year. It is like seeing your tax bill 6 months in advance. But the advantage is that this tax bill is not finalised yet. If you don't like the tax amount shown, you could still explore ways to reduce the amount. 

Tax Planning for Yourself

Below is a screenshot of the tax calculator downloaded from IRAS' website

Tax Calculator to Decide How Much Tax You Want to Pay

Here, you could see all the possible personal tax reliefs that could be claimed. You could run through each of them to see whether you are eligible for it. The hyperlinks in the tax calculator links you to an explanation and the eligibility conditions for each of these tax reliefs. If you find that the estimated tax amount is too high for your liking, then you might want to consider additional tax reliefs, such as CPF cash top-up relief and SRS relief. However, to be eligible for these reliefs, you will need to incur some expenses or contribute some money first. For example, to be eligible for the parent tax relief, you will need to incur at least $2,000 to support your parents. To qualify for CPF cash top-up and SRS reliefs, you will need to contribute some money into them.

CPF cash top-ups can be a good way of supporting your parents, especially if they are over the monthly drawdown age of the CPF Minimum Sum Scheme (ranging from 60 to 65 years old). You can top-up their CPF accounts using cash either via a lump sum or monthly contributions and be eligible for the CPF cash top-up relief while they can receive monthly payouts from CPF. Whatever money still kept in the CPF attracts an interest rate of 4%, which is very attractive compared to today's low interest rates for bank savings.

Notwithstanding the above, it is not necessary to contribute the maximum towards CPF and/or SRS to fully maximise the tax benefits. Contribute what you can afford and it will go some ways towards saving some money for yourself. Ideally, tax planning should be carried out on a regularly basis, especially during the times when you receive your mid-year, year-end and/or performance bonuses to spread out the amount to be contributed so that it is not so onerous. In fact, for CPF cash-tops, you could even sign up for monthly contributions through GIRO.

Tax Optimisation for Your Family

Besides doing tax planning for yourself, you could also optimise the tax bill for your entire family. For example, the parent tax relief could only be claimed by 1 sibling for each parent. Ideally, this should be claimed by the person with the highest tax bracket as this will result in the largest reduction in the tax amount. There are also different amounts that could be claimed under the parent tax relief. For siblings who are staying with their parents, they can claim a higher tax relief of $7,000 compared to only $4,500 for those who are not. Hence, this can also influence who should be the one claiming the parent tax relief.

Likewise, for the Qualifying Child Relief, you could also decide with your spouse who should be the one claiming this relief so as to minimise the tax bill for the family.

Conclusion

Nobody likes to pay income tax. Tax planning will help to reduce the amount of tax you and your family need to pay. Tax planning is not necessarily for the rich, even middle-income families can benefit from it.


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