4 strategies to lower your income tax for YA2020

As we approach the end of 2019 and welcome the year–end holiday season, the window of opportunity for you as a taxpayer to effectively lower your taxable income for YA2020 or income earned in 2019 is also narrowing.

One of the surest paths to financial independence is to lower your expenses while making smart investing decisions, and that includes paying thousands of dollars less in taxes, legally!

For illustration simplicity, a person who earns about $40,000 a year without any deductibles, reliefs or rebates will be paying about $550 in income tax while another who earns 3 times more will be paying close to 14 times more! (The gross tax payable of an individual with an annual income of $120,000 amounts to roughly $7,950)¹

Given that tax filing can be a tedious process for most taxpayers, the Inland Revenue of Singapore (IRAS) has made it relatively easy for you to file your income tax by auto populating your earned income from your employer as well as the reliefs that you are eligible for, such as your Earned Income Relief, NSman Relief and CPF Relief.² If you are a new parent, the Parenthood Tax Rebate and Working Mother's Child Relief (WMCR) will also kick in to encourage more Singaporeans to have children amidst the declining birth rate and to nudge mothers to continue staying active in the workforce.

Here, we will focus on 4 strategies to significantly add to your tax–deductible arsenal.

1.  Open an SRS account and start contributing
One of the best weapons for taxpayers since 2001³, the Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement over and above their CPF savings. Contributions to SRS are eligible for tax relief and investment returns are tax–free before withdrawals with only 50% of the withdrawals from SRS taxable at retirement.⁴

However, contributions to SRS from Singapore Citizens and Permanent Residents are currently capped at $15,300 a year, while the cap for foreigners are at $35,700.

As of December 2017, there are over 140,000 SRS account holders with a combined contribution in excess of $8.15 billion, or an average of about $58,214 per account holder. According to the Ministry of Finance, about 60% of SRS account holders are between the age of 36 and 55, and about 33% of the SRS portfolio remains uninvested⁵, yielding a nominal interest rate of just 0.05% per annum.⁹

Since the scheme started, investing in Unit Trusts using SRS remains a popular option with over $733 million invested.⁵ At dollarDEX, we have a comprehensive range of SRS funds for your consideration if you are keen to grow your SRS monies instead of keeping it in the SRS account at the bank earning a nominal interest rate. Find out more about our SRS funds here by choosing 'SRS' under the 'CPF/SRS' filter box in our Fund Finder.

2.  CPF cash top up for yourself and your loved ones
The CPF cash top–up relief is given to encourage Singaporeans and Permanent Residents to set aside money for retirement needs either in their own CPF Special Account (if below age 55) or Retirement Account (if age above 55) or those of their family members.

With CPF Special Account (SA) yielding a minimum guaranteed interest of at least4.0% interest⁶, it could be worthwhile to squirrel your money away in your provident fund to both save on tax and earn a higher interest. Also, if you have been diligently expressing your love or filial piety to your retired parents or grandparents by giving them a monthly allowance in cash, perhaps it could make sense to top–up their CPF instead since they are able to perform withdrawals any time.⁷

However, like all good things, there is a limit to how much CPF top up relief you can get. The current cap is $7,000 for contribution to your own CPF SA/Retirement Account (RA) accounts and another $7,000 to the CPF SA/RA of your family members, making up a total of $14,000.

If you like to stretch your retirement dollars further, you can consider investing your CPF Ordinary Account (OA)/SA funds into unit trusts available on dollarDEX by choosing 'CPF' under the 'CPF/SRS' filter box in our Fund Finder.

3.  Course fee relief
If you have been actively upgrading yourself or thinking to further your studies, here's a compelling reason for you to kill two birds with one stone – gain knowledge and at the same time save taxes!

In a bid to encourage Singaporeans to continuously upgrade their skills and enhance employability through academic, professional or vocational qualifications, eligible taxpayers can claim up to a maximum of $5,500 each year regardless of the number of courses, seminars or conferences you have attended.

You may read about the types of courses, seminars or conferences eligible on the IRAS website.

4.  There's no better reason to start giving
Finally, the most powerful tool in the tax reduction arsenal is to give, give, give. And by giving, you can tap on the deductions on donations scheme.

IRAS is flexible enough to allow gifting in other forms instead of simply through cash. You can also donate in shares, unit trusts, computers, artefacts, works of art, even land and buildings!

Approved donations (including donations with naming rights) made during the period of 1 Jan 2016 to 31 Dec 2021 are entitled to 2.5 times tax deductions!⁸

Unlike topping up your SRS, CPF or upgrading through courses which are classified under personal tax reliefs, and subject to a cap of $80,000, deductions on donations are not subject to any cap.

In fact, you can even carry forward unutilized tax deductions for donations to an approved Institution of a Public Character (IPC) for a maximum of five years.⁸

Check out the list of approved IPCs before you start your kind samaritan journey!

There is a whole slew of other deductibles, reliefs and rebates available on the IRAS website ranging from Deductions on Rental Expenses if you are a property investor, to Deductions under Angel Investors Tax Deduction Scheme (AITD) if you have invested at least $100,000 in qualifying start–up companies for a continuous period of 2 years.

However, do note that from Year of Assessment (YA) 2018, the total amount of personal income tax reliefs allowed is subject to an overall cap of $80,000 per YA, which does not affect most taxpayers. A possible scenraio could include high–income earning mothers with 2 or more children due to the attractive WMCR scheme.²

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