Last chance to secure your income tax relief for 2019

Dear Readers,

Thank you for coming here.

It is the second last day of 2019. Have you secured your income tax relief for 2019? If not, below are 3 things you should do right now.

First of all, lets distinguish tax relief and tax rebate.

• Tax relief means a portion of your income is not subject to tax. 
• For example, your annual income is 200KSGD and you can claim a tax relief of 40K. Now your taxable income is 160KSGD. According to the income tax rate 2019, you should pay 7,950 (For first 120K) + 6,000 (for additional 40K) = 13,950SGD in income tax. 
• Tax relief typically applies every year and we need to be mindful about the timing to enjoy some of them, such as various Top-up schemes
• There is an overall tax relief cap of 80KSGD per year. I doubt I will ever hit that cap.
• Tax rebate means a portion of your income tax is off-set and does not need to be paid by you. 
• For example, your income tax is 13,950SGD and you enjoy a tax rebate of 5000SGD.  The actual income tax you need to pay is 13,950-5000 = 8,950SGD. 
• Tax rebate is typically one-time. Once you use it up, it is gone. And before you use it up, it will stay in your (or your partner's) account and be automatically carried forward to next year. While it is advisable to use it up as soon as possible as the balance does not generate any interest, the risk of losing them is very low, unless you do not know about it at all or complete forget about it.
• The tax rebate that applies to most of Singaporeans is Parenthood Tax Rebate (PTR), which is intended to support parents with children. It is 5K for 1st child, 10K for 2nd child and 20K for each child for 3rd and subsequent children. It is pretty generous as our government really loves babies and you and your partner can split it anyway you want.

In this post, we will focus on the 3 types of tax relief that typically applies to employees with regular pay-check, which I guess is most of us. You need to complete them by year end to enjoy the relief, which is literally TOMORROW!

So let's begin. While you need to determine your priorities based on your own situation, below sequence is what I follow and suggest.

• Voluntary Contributions (Cash) to Medisave Account (VC-MA)
• If you have not reached your Basic Health Sum (BHS) and you have not reached the annual CPF contribution cap (37,740SGD), you can top up your MA using cash and enjoy the tax relief
• According to IRAS website, the amount of tax relief given is the lowest of the following:
  
  • Voluntary cash contribution directed specifically to Medisave Account
  • Annual CPF contribution cap for the year, less Mandatory Contribution (MC) 
  • Prevailing Basic Healthcare Sum(BHS)^, less the balance in Medisave Account before the voluntary cash contribution.
• The process is fairly straightforward. Just follow the CPF instructions. If you give CPF a call, they will also walk you through it step-by-step
• Remember to use PAYNOW option to enjoy the almost immediate transfer. Wire or check is likely to miss the deadline, which is tomorrow. 
• Best time for doing this for me is late Jan every year to enjoy the max interest or when some Medisave money is used if you have reached BHS. This requires you to have a reasonably good forecast of your annual CPF contribution though. 
• Top up (cash) your CPF Special account (SA, below age 55) or Retirement account (RA, age 55 and above)
• You can top up your or your relatives' SA or RA all the way to the Full Retirement Sum (FRS)
• The tax relief would be the lower of your cash top-up amount and 7KSGD
• You can also top up your relatives' SA (Parents, ground parents, spouse or siblings) if they meet the requirements (basically low income) to enjoy additional tax relief, up to 7KSGD as well
• Again, follow the CPF instructions and use PAYNOW  
• Best time for doing this for me is late Jan every year to enjoy the max interest
  
• Top up (cash) Supplementary Retirement Scheme (SRS) account
• You can open a SRS account with DBS, OCBC or UOB. Sometimes, they even provide cash benefits if you open an account with them. Do check and grab the "free" dollars.
• The benefit of this account is that your contributions is tax free, up to 15,300SGD per year. You can invest the money. When you withdraw the fund upon or after retirement, only 50% of the withdraws are taxable
• The potential down-side is that if you withdraw before retirement, 5% of penalty will be imposed. Therefore, it is advisable to open your SRS account now, to lock in the retirement age after which you can withdraw the fund from your SRS account without the penalty. 
• Once you open an account, the top-up is like any other bank transfer. However, it does take a few days for the account to be opened.
• Best time for doing this for me is when my bulk of dividend has come in. This way, I can invest the dividend together with the new contribution to save fees. The fee to invest this account is not the best.

If you have done all 3, super! If you have not, do so now. A dollar saved is a dollar earned.

Till the next time.