Tax Planning 101
The saying goes, there is nothing certain in life but death and taxes. Every year, we get a letter thanking us for our contribution to nation building. While I think paying taxes is an important part to the entire fiscal system, proper tax planning allows us to not pay more taxes than what is legally necessary. In this article, I highlight 3 simple things you can do to reduce your tax obligations while achieving other objectives such as retirement planning.
CONTRIBUTING TO THE SUPPLEMENTARY RETIREMENT SCHEME (SRS)
The Supplementary Retirement Scheme (SRS) was launched in 2001 to encourage individuals to save for their retirement, complementing their existing CPF funds. You can open an SRS account with any of the 3 local banks (i.e. DBS, OCBC or UOB). This allows you to contribute a maximum of $15,300 a year to your SRS account for Singapore Citizens and Permanent Residents. Your tax obligation for the year of assessment will be reduced by the corresponding amount contributed.
There are a few rules governing the use of the funds in the SRS you should be aware of. Firstly, the funds can only be withdrawn based on the statutory retirement age when the first contribution is made. The current statutory retirement age is 62. Early withdrawal will incur a penalty of 5% while subjecting the full amount withdrawn to taxation.
Secondly, the tax is deferred rather than avoided all together. Upon withdrawal at the statutory retirement age, 50% of the amount withdrawn will be subjected to the prevailing income tax. The assumption here is your income will be significantly lower during your retirement years than your working years. Hence your tax obligations will be much lower or negligible depending on your income post the statutory retirement age.
Lastly, the SRS account provides minimal interest to funds left in the account. The scheme allows you to channel the funds elsewhere to earn you higher interests. This can be in the form of stock investments, insurance policies, etc. If your tax liability is substantial, contributing to the SRS can be an effective way to reduce your taxes by up to 20 to 30% per annum.
TOPPING UP THE CPF SPECIAL ACCOUNT
Another way to enjoy tax relief is by doing a cash top up of the CPF Special Account (SA) via the Retirement Sum Topping Up (RSTU) scheme. Through this scheme, you enjoy up to $7,000 tax relief per calendar year if you are topping up for yourself, or an additional $7,000 if you are topping up for your loved ones (i.e. spouse, parents, parents-in-law, grandparents, grandparents-in-law and siblings). Do note topping up for spouse and siblings is only allowed if their annual income does not exceed $4,000 in the preceding year or if they are handicapped.
By topping up the CPF Special Account, you are building up your CPF retirement savings while enjoying tax relief up to $14,000 (i.e. $7,000 for self, $7,000 for loved ones) in the year of assessment. You can top up to your own and/or your loved ones’ Special Accounts up to the current Full Retirement Sum (FRS) to qualify for the tax reliefs.
While contributing to the SRS account allows some flexibility in how the funds are utilised, topping up the Special Account is irreversible. Once the funds are transferred into the Special Account, you are only able to withdraw from the account based on prevailing CPF withdrawal policies. Hence do plan your cash flow before doing the transfer.
DONATIONS TO INSTITUTION OF A PUBLIC CHARACTER (IPC)
Lastly, you can enjoy tax reliefs while doing good for society. Cash donations made to an approved Institution of a Public Character (IPC) are tax deductible. Note not all registered charities are approved IPCs. Donations made to a charity without approved IPC status are not tax-deductible.
To encourage philanthropy, there will usually be a multiplier applied to the cash donations made in calculation of the tax relief (i.e. your eligible tax relief will be more than the cash donations made). The current multiplier is 2.5x. This allows you to meaningfully reduce your taxes while doing good.
The above are 3 simple steps you can take to reduce your taxable income based on prevailing tax policies. Information is correct as of publishing. As tax policies can change from time to time and individual circumstances may differ, do consult a qualified tax or financial advisor on the prevailing policies before committing to them.