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Make more money, do good and pay less income tax.

Friday, March 8, 2013

I filed my income tax return for the Year of Assessment 2013 (YA 2013) online.


Although I received more income last year, I will be paying less income tax for YA 2013 compared to the year before. Incredulous? How could this be? Could it be true?

Regular readers would know that a large portion of my income is passive and non-taxable. So, to pay less income tax for YA 2013 compared to the year before, did my earned income from employment decline? Nope, it remained more or less the same as the year before although the probability that it could decline in future exists.

The lower than expected estimated income tax for YA 2013 is because of donations I made to 6 charitable organisations last year which enjoy 2.5x tax deduction and the 30% personal income tax rebate I am eligible for from the government.

Of course, I am pleased to be paying less tax but I am happier still that I am doing good with my donations to several recognised charities in Singapore.

If we can afford it, let us be charitable and donate to the less privileged. We will also pay less income tax in the process. Everybody wins. Sounds good, doesn't it?

If you are wondering about the personal income tax rebate, the following table is taken from IRAS:

Age as at 31 Dec 2012 Personal Income Tax Rebate for the Year of Assessment 2013
Below 60 years 30% of tax payable, subject to a cap of $1,500
60 years and above 50% of tax payable, subject to a cap of $1,500

What I have also been doing every year is to contribute to my SRS account to the maximum amount allowed. This has been a big help in reducing the amount of income tax payable. I would encourage anyone who is currently paying income tax and who does not have an SRS account to consider starting one.

So, is it possible to pay less income tax while making more money and doing good? Yes, of course!

If you tell your family and friends about this and they don't believe you, share or like this page and tell them that if AK71 can do it, so can you! Believe in yourself.

Related posts:
1. Counting our blessings.
2. SRS: A brief analysis.
3. 2012 full year passive income from S-REITs.

34 comments:

AK71 said...

Assuming only those with an annual income above $40,000 pays tax, there are around 720,000 tax-paying individuals. Out of this, only slightly more than 70,000 are SRS account holders.

This means only 10 per cent of people who are eligible to open an SRS account have done so.


Source: CNA, 13 Dec 2012.

BP said...

I read that you put the funds on srs into single premium endowment that yields 3-4%. Those are guaranteed?

I'm contemplating to put open an srs account but was thinking if the lock down period is worth it

AK71 said...

Hi BP,

The Guaranteed Rewards Endowment from UOB Life is no longer available.

However, I just did a quick check and the NTUC Growth Plan is still available.

From my research, the NTUC Income Growth Plan has the biggest guaranteed returns portion compared to similar products offered by other insurers.

For example, a $50k sum would become $61,439 after 10 years. This is equivalent to compounding 2.1% per annum. This is more or less a risk free return. Add your tax savings, depending on your income bracket, the returns are similar to CPF-OA's.

Of course, there is also a non-guaranteed returns portion. This is $13,177 for a 10 years policy.

You can learn more about NTUC Income Growth Plan: here.

Bill said...

Hi ak

I read that you could also contribute to cpf and will enjoy tax breaks. Any idea on this?

Jay said...

AK: Are you getting a commission from NTUC? ;-)

2.1% over 10 years? I wonder if I would then rather get a deposit (if 10yr deposits or COD's are available here), or buy a Singapore government bond? I think before the Singapore government will default, NTUC will have long dissapeared...;-)

AK71 said...

Hi Bill,

It could work for some people. Why only some? There is a limit on voluntary CPF contributions.

The maximum amount of voluntary contributions a person (employee or self-employed) can make in one calendar year is subject to the CPF Annual Limit.

All CPF contributions, whether mandatory or voluntary, will form part of the CPF Annual Limit. From 2011, the CPF Annual Limit is $30,600.

The maximum amount of voluntary contributions (VC) that can be made for the calendar year is as follows:

Maximum amount of VC = $30,600 – Mandatory Contributions

No further voluntary contributions can be made if the mandatory and voluntary contributions have already reached the CPF Annual Limit.


This is where the SRS comes in. :)

AK71 said...

Hi Jay,

Unfortunately for me, no. :(

There are many options available, I am sure, and I do not know all of them. We just have to do our research and settle for the option we are more comfortable with. :)

Bill said...

Hi Ak71

This is amazing advice and information coming from a Singaporean stock market blog.

Thanks!

I suppose it pays off to be well informed on taxes too

tsusmagne said...

hey ak,

this is the first time i am hearing of this srs thing. serious.

thanks much for intro - i went to check it out on the iras webbie already.

have 3 really noobish questions that i cant find the answers for - hope you can enlighten!!

1) srs essentially seems like a tax deferral scheme. are we running the risk that personal income tax rate could be much higher in the future e.g. at our retirement age. so paying 50% later on could be equivalent to paying 100% now.
2) When we withdraw our srs at retirement age, we pay tax on all the contributions plus returns from the investments made by srs funds - are we not indirectly paying capital gains tax?
3) our tax relief matched dollar for dollar is given to us only in the next Fy. what is we have no income in the next Fy? do we get a tax refund e.g. a cheque for the rebate (sorry not sure how this works never got a refund before :( )

AK71 said...

Hi Bill,

You are welcome. :)

Businesses try to pay less taxes and if we run our lives like we would a business, why shouldn't we think of paying less taxes too? Of course, we must do it legally. ;)

Serendib said...

AK71, note that the voluntary contribution (which is divided up into OA, SA and MA and capped as you explain) is separate from the minimum-sum sum top-up scheme - this allows you to top-up up to $7k annually into your SA (tax deductible) (and a further $7k to that of qualifying relatives) as long as your SA balance does not exceed the prevailing minimum sum
http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_10Sept2012_MF.htm

I have been contributing the max $30,600 to CPF and a further $7k top-up for a number of years now. IMHO cash top-up of SA is a better deal than SRS.

AK71 said...

Hi tsusmagne,

You raised good questions. :)

Answer to question 1:

Even if the tax rate on earned income should double by the time we retire, we would only pay more in income tax if our annual SRS fund withdrawal is more than our earned income prior to retirement. This is unlikely for most people.

It is reasonable to assume that a dollar 20 years later is worth much less than a dollar now. So, if I could save on paying taxes now, I would do it.

Answer to question 2:

Indeed, income tax would be payable on both contributions as well as capital gains at the time of SRS funds withdrawal.

So, do we want to contribute to SRS and save on income tax today and be taxed on 50% of possible capital gains from investments at retirement? Or do we want to pay more income tax today and avoid having to pay capital gains tax at retirement?

This is a difficult answer to question as there are too many variables. What is our tax bracket today? How well are we able to grow our investments annually?

Answer to question 3:

Just like CPF contributions, SRS contributions are taken into account in the same year.

Since we have until end of the year to make a contribution to SRS, someone who has no income which would attract income tax for the year has no reason to make SRS contributions in the same year.

There is no need for refunds.

I provided a link to the SRS booklet by MOF in an earlier post. You might want to check it out: SRS: A brief analysis.

I hope my reply is helpeful. :)

AK71 said...

Hi Serendib,

I agree that it is indeed a better deal than contributing to SRS. The SRS makes sense to people who have already maxed out their CPF contributions.

Unfortunately for me, for example, I am no longer allowed to voluntarily contribute to my CPF SA. :(

Serendib said...

Hi AK71,
well I must say I've been fortunate that they keep increasing the minimum sum yearly and with the change last year (only your SA balance needs to be less than MS) I've been able to contribute... I calculate I have a few more years left to top-up. Thereafter, I will consider SRS, but I suspect that I won't. Too many variables to determine what my taxable income will be like when I hit the mandatory retirement age. I'd hate to be working and then being forced to withdraw my SRS and pay tax on it! I hope the govt will consider scrapping the taxation at withdrawal - it will make SRS a lot more attractive.

AK71 said...

Hi Serendib,

I don't understand this:

(only your SA balance needs to be less than MS)

Could you elaborate?

As for withdrawal of SRS money, we won't be forced to withdraw at age 62. We can withdraw at any age after 62 without penalty.

My parents are 65 and 66. They are still working and they are still contributing to their SRS accounts. :)

Serendib said...

Hi AK71,

only your SA balance needs to be less than MS - previously one's combined OA+SA balance had to be below MS. Since Sept last year this is no longer the case. Only your SA balance has to be below the prevailing MS. See link:
http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_10Sept2012_MF.htm

Ref SRS withdrawal date, you're right, you can withdraw "penalty-free" anytime after your retirement age. But max 10 year period once you start your first withdrawal.

AK71 said...

Hi Serendib,

Ah, I see what you mean. My SA is above the MS. I guess that is why I am not allowed to make any voluntary contributions.

Yes, we are allowed a total of 10 years from the first withdrawal date to withdraw all the money in our SRS account. If we should have only $200K in our SRS at the time, I guess withdrawing $20K each year would mean that we won't have to pay any taxes then.

BP said...

SA is not fully withdrawable correct?Since it forms part of the minimum sum. So SRS may be better in this case.

If my cpf contribution is already capped, does that mean I can no longer voluntarily contribute to SA?

AK71 said...

Hi BP,

I look at both CPF SA and SRS as useful tools in preparing for a financially secure retirement. Of course, they are different tools and have different characteristics.

As Serendib has explained, as long as our SA has less than $139k which is the prevailing minimum sum, we are allowed to do voluntary top ups. See: CPF Top-ups.

Serendib said...

Hi AK, what you meant is that you can't do any top-up of your minimum sum .... Voluntary contribution is a separate matter. Really confusing! I wish CPF would come up with better terms!
And yes you will pay no taxes on the $20k per year - assuming you have no other taxable income of course! But if the govt's efforts to increase incomes succeeds, I think that $20k threshold will be moved up?

Sanye ◎ 三页 said...

I have started my SRS account since it was implemented. I have been encouraging my colleagues to contribute to SRS.

If things go as planned, I will only withdraw my SRS after I stop working. So even if 50% of the withdrawn fund is taxable, it will fall into the lowest tax bracket and I will pay much lower tax.

If something goes wrong and a premature withdrawal is necessary, I thing the tax saved will more than offset the panelty paid.

AK71 said...

Hi Serendib,

I downloaded the form:
Voluntary Contribution for CPF Member.

Let me try to untangle the web.

If we refer to the notes, it says that the annual limit is $30,600 and any contributions (voluntary and mandatory) in excess of the limit will be refunded without interest. This is non-tax deductible.

Whether we can do a topping up to the minimum sum required, however, is based on the SA limit of $139,000 (till June 2013). So, if we have less than $139,000 in the SA, we can do a top up. This is tax-deductible.

I hope I got it right. :)

As for the SRS, it would be most fortuitous if the government should raise the level of non-taxable income from the current $20k in future.

I am a lazy guy and it is unlikely that I would be gainfully employed at 62. I might have rental income but increasingly that idea has become less appealing. ;p

AK71 said...

Hi Sanye,

I also started an SRS account in the year it was introduced and have been contributing to the max annually. :)

I also plan on withdrawing from my SRS account only after I turn 62 or stop working, whichever comes later.

There is still much skepticism surrounding the SRS. Even though some concerns are valid, as long as we do not plan to withdraw our SRS funds unless we turn 62 or stop working, whichever comes later, there are more positives than negatives. :)

Serendib said...

Hi AK,
your presentation of VC and MS top-up looks correct to me, and far more understandable than my attempt =)
I'm really surprised that VC is non-tax-deductible!

AK71 said...

HI Serendib,

Yup, VC is non-tax deductible. An important observation. You learn something and I learn something. :D

Were your VCs tax deductible before?

BP said...

Hmmm, I looking at the form and I'm more confused, whats the difference between VC into SA and top up into SA?

AK71 said...

Hi BP,

Voluntary contribution is limited to $30,600 per year minus any mandatory contributions in the same year.

Top up to minimum sum is limited to $139,000 (valid till June 2013) minus whatever we already have in our SA.

Of course, your best source of information is the CPF Board. Haha.. ;)

Serendib said...

Hi AK, I've not made voluntary contributions before.

AK71 said...

Hi Serendib,

Ah, I must have misunderstood your initial comment.

So, you have only done top ups to your SA which you have found to be tax-deductible. :)

DreamIT said...

Hi AK71,

Does your passive income includes profits from trading shares?

Just to share my situation. I have already max out the SRS contribution and also contribute to charity. I am not very willing to contribute further to CPF as it seems quite complex and not sure how the withdrawal will be affected by the increasing withdrawal limit. In such situation, my income tax will just keep going up if my employment income increases. Of course, to help myself against the inflation, I will try to increase my passive income through dividends from shares. But this is getting more challenging with the high dividend shares price climbing to higher peaks.

DreamIT said...

Hi AK71,

Does your income includes profit from trading shares?

I have already max out the SRS, contribute to charity and not planning to contribute further to CPF. I am also trying to grow my passive income by buying high dividend shares but it is getting more challenging as prices go up.
In my situation, is there anything more I can do to reduce my income tax?

AK71 said...

Hi DreamIT,

Passive income is, well, passive. Trading sounds like work to me. ;p

So, no, passive income from my investments does not include trading gains which, of course, is also not taxable.

As for voluntarily contributing to CPF, I believe there is a cap and further contribution will not lead to lower income tax.

You could try contributing to the CPF accounts of family members for more tax relief:

Come January 2013, cash top-ups to parents-in-law and grandparents-in-laws’ Special or Retirement Accounts will also enjoy tax relief. With this, CPF member may enjoy up to $7,000 tax relief for cash top-ups to family members, including to one’s spouse, siblings, parents, parents-in-law, grandparents and grandparents-in-law. Together with cash top-ups into one’s own CPF account, members can enjoy up to $14,000 tax relief.

Read:
EXTENSION OF CPF MINIMUM SUM TOPPING UP SCHEME

Hippy said...

Hi AK,

Both me and husband are foreigner, I am thinking to open up a SRS account for him and contribute to 10K per year.

I have did the calculation by using the OCBC website tool. It shows me a saving of 1K tax per if i do this.

However, I am confused on few things :
(1) my own SRS account only give me 10cents of interest each month. I do enjoy tax relief of 1.2K this year thanks to this.
So other than the tax relief part, can I say the interest generate by SRS account is not so interesting ?

(2) Re the paying 50% tax at withdrawal, if we withdraw 20K every year during 10 years, we should be able to save up this 50% tax upon withdrawal. Are we refering to the 10 years after the retirement age in SG ? Does this applies to the foreigners as well ? I thought you could withdraw from the SRS account after locking up the money for 10 years ?

(3) Friends and husband is asking me why is it worth to lock money up for tax relief now and pay 50% later anyway. I can't justify, can you explain ?

thanks for helping and have a nice day.

regards,
Hippy

AK71 said...

Hi Hippy,

Before I start, I must say that I am probably not the best person to answer your questions but I will share with you my take on the matter.

(1) Leaving money in the SRS account will attract a miserable interest income. It is true. However, the huge up front savings in income tax is hard to ignore. Also, you could invest the money in the SRS account for higher returns or put in a fixed deposit for higher interest income.

(2) SRS is meant to help us with our retirement needs. So, early withdrawal before the official retirement age will attract penalties. If we are still gainfully employed at age 62 (the official retirement age), we can choose not to withdraw the money until later. Once we commence withdrawal of the funds, all money must be withdrawn within a 10 year period.

(3) If we have $200,000 in our SRS account by retirement age and if we no longer have an earned income then, keeping the withdrawal rate to $20,000 a year for the next 10 years will mean that we won't have to pay any tax at all. This makes sense to me. It is additional (tax free) funds which will come in handy at retirement.

I hope talking to myself here is not confusing you (too much). -.-"

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