Tuesday, 6 December 2016

How To Pay Less Income Tax LEGALLY

Source: https://www.iras.gov.sg/irashome/TaxSeason2016/
Click Image to Zoom In (note: info is for YA2016, the upcoming one is YA2017)
Now is the time of the year where you need to take stock of your personal finance so that you can legally pay less income tax for YA2017. Why is this important? I am a firm believer of this expression by Benjamin Franklin, "a dollar saved is a dollar earned". In fact, a dollar saved today is BETTER than a dollar earned in the future due to time value of money.

Some of my friends and relatives do not like to go through their income tax returns because they think it is too troublesome. I wouldn't complain since their contribution will be channeled towards our nation building. For tax residents (Singapore Citizens (SC) and Permanent Residents (SPR) who resides in Singapore) who like to find out how to pay less income tax legally, read on....

Download a copy of the income tax calculator for YA2017 here! The file is in .xls format. 

The first step to understanding your income tax returns is to identify the critical components of your income tax and how your tax payable is derived. There are 5 critical components and they are your total income, donations, personal reliefs, parenthood rebate and net tax payable.

1. Compute Total Income 

Total Annual Income
The first section of your tax filing begins with your total annual income. For most full-time employees, your employment income is the only income you will receive. Do note that this figure is the gross income without excluding CPF contributions. If you are your own boss, company director or property owner, there might be other sources of income you have to declare.


2. Compute Personal Reliefs

Personal Reliefs
The second section we will look at is the personal reliefs. Fill in the personal reliefs you are entitled to. Earned income relief is $1,000 if you are below 55 (handicapped person will have higher relief). Your CPF contribution for the year will go into this section. With a total employment income of $70,000, one would have contributed $14,000 to his/her CPF account based on a 20% CPF contribution rate. For those earning more than total income of $72,000, do note that there is a ceiling for tax relief for both the ordinary wages and additional wages.

3. Assess the Chargeable Income and Tax Payable

YA2017 Tax Bracket (revised from YA2016)
In this third section, we have derived at the expected tax payable. The tax rate on the chargeable income can be found at the bottom of the tax calculator spreadsheet. For this example, we are in the tax bracket of "first 40,000- $550 and next 40,000 - 7%". Now is the time to make decision, a trade off between liquidity and saving money. 

4. Cash top up to CPF SA/ Contribute to SRS account/ Donate Money to Approved Institution. 

Final Tax Payable
From YA2017, IRAS implemented a new cap of $80,000 on personal reliefs which got many high income working mothers fuming. If you are the top 1% of working mothers affected and you are reading this (I highly doubt it), you can only donate your money to reduce income tax payable.

For the rest of the 99% of us that are unable to hit the cap of $80,000 personal reliefs, you can use one or a combination of the above 3 methods to legally reduce your tax payable. None of them is without trade off (because there is just no free lunches in the world). In the above example of $52,000 chargeable income, we can aim to reduce the 7% portion of the chargeable income, $12,000 in this case, as it is a significant amount.

By topping up $5,000 to your CPF SA and contributing $7,000 to your SRS account, you effectively reduce chargeable income by $12,000 and tax  payable by $840. Do ensure any amount you decide to part with, whether it is CPF SA or SRS account is an amount you can live without until retirement. With respect to donations, a $4,800 donation will be equivalent to a $12,000 reduction in chargeable income (it has been reduced from 3x to 2.5x in YA2017). However, you won't see this money ever again! Well... at least you can directly contribute to a cause you strongly believe in.

The decision will be more straightforward for high income earners in the 10%+ income bracket, to maximize your CPF SA cash top up relief (maximum of $7,000), SRS contribution ($15,300 for SCs and SPRs) and approved donations (2.5x of approved donations) to reduce income tax payable.

5. Conclusion

Finally, like all responsible working adults, we are expected to contribute our part towards nation building. Just this year,  I read on a few cases of tax evasions where the punishment involved jail terms and hefty fines. IRAS is very sharp in uncovering tax crimes, they do this for a living! If you can pay less taxes by legal means, go ahead. Otherwise, do not try anything illegal like under declaring your income or whatsoever.

Besides reviewing your income tax payable, December is also a good time to review your investment portfolio. I am going to review mine soon and identify some possible investment opportunities heading into 2017. Stay tuned for more updates!

Best,
AT

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Financial freedom = Passive Income > Expenses. Always remember that there are two sides to the equation of financial freedom. Beside working on how to improve our passive income through investing, we should never neglect the expenses portion. By striving to improve both side of the equation, we can achieve our financial goals and win in the game of money.

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