How to save on income tax [Dec 2019 update]

Source: Pexels / Skitterphoto

Here’s a quick and dirty checklist. Why am I doing this? Because I spent too much time figuring this out [2019 Edit: in both 2018 and 2019!] and it’ll be a waste not to share this with my friends. All figures are on the assumption that you earn $120,000 per year.

I. Open an SRS account and transfer $15,300 in.

• Tax saved: $1,759.50 (11.5% of $15,300)
• Downside: money is stuck in SRS account. But don’t just let it sit there. Invest it in something long-term. Why? Because you can start to withdraw it from the age of 62 (the present retirement age). You pay taxes on 50% of the amount you withdraw, but if you are retired with no income, you pay even less or no taxes on the withdrawn amount.
• [2019 Edit: To expand on the above, the interest rates for SRS accounts are not great. But the idea is to use the money in the SRS account for long-term investments that you do not intend to cash out until retirement. Even if the investment returns are only middling, remember that you are saving 11.5% in taxes, which is huge.]

II. Transfer $7,000 to your CPF Special Account (SA).

• Tax saved: $805 (11.5% of $7,000)
• Downside: money is stuck in SA. But you get interest of 4%. And when you hit 55, if your Ordinary Account (OA) + SA exceeds $176,000 (the “Full Retirement Sum”), you can withdraw the difference. Yes, $176,000 is a lot of money. Yes, it’s a moving target and if you’re around my age, the Full Retirement Sum is probably going to be something like $400,000 by the time we hit 55. But if you have $65,000 in your SA and you contribute at least $8,400 per year (CPF’s automatic allocation of 7% of your $120k salary anyway), you’ll hit $400,000 in 20 years.
• Complicated? I know! PM me if you’d like more info. Remember, this is just a quick and dirty checklist!

III. Transfer $7,000 to your parent’s/spouse’s SA/Retirement Account. [2019 Edit: This stacks with II above, for a total of $14,000.]

• Tax saved: $805 (11.5% of $7,000)
• Downside: see II above. [2019 Edit: actually, I think the real downside is that you’re giving the money away to someone else.]
• Wait a minute. Can me and my spouse both transfer $7,000 to each other? Maybe! I don’t know! I’ll call CPF tomorrow to find out. Edit: you only get tax relief if your spouse is earning $4,000 or less for the year. So, no, you can’t cross-transfer. But if you’re the sole breadwinner, consider this!
• [2019 Edit: If one of your parents is (a) 55 or above; and (b) has, in their CPF Retirement Account (“RA”), the Full Retirement Sum (“FRS”) or the Basic Retirement Sum (“BRS”) + eligible property, this is a complete no-brainer. This is because they are entitled to withdraw, from their CPF RA, any amounts above the FRS / BRS. [S̶o̶ ̶y̶o̶u̶ ̶c̶a̶n̶ ̶t̶r̶a̶n̶s̶f̶e̶r̶ ̶$̶7̶,̶0̶0̶0̶ ̶t̶o̶ ̶t̶h̶e̶m̶ ̶a̶n̶d̶ ̶t̶h̶e̶y̶ ̶c̶a̶n̶ ̶w̶i̶t̶h̶d̶r̶a̶w̶ ̶i̶t̶ ̶t̶h̶e̶ ̶v̶e̶r̶y̶ ̶n̶e̶x̶t̶ ̶d̶a̶y̶ ̶i̶f̶ ̶t̶h̶e̶y̶ ̶w̶i̶s̶h̶.̶ This is actually not correct — sorry! It is stuck there. But it is still worth doing if they have a healthy amount in their Ordinary Account / RA.] I know this is complicated because this explanation requires an understand of how the CPF RA works. Again, PM me if you’d like to discuss. If it helps, I regret not doing this last year.]

IV. Voluntary CPF top-up [2019 Edit: I wrote a longer article on this. I am now convinced that this is a no-brainer, IF you are a parent and wish to leave an inheritance to your child(ren).]

• Hoo boy. This is tricky.
• If you’re an employee, you’re already putting in the maximum of $37,740 into your CPF every year. So don’t bother reading further.
• If you’re self-employed (you lot know who you are), you have compulsory Medisave contributions of $5,760. So you can theoretically top up another $31,980. But don’t get too excited yet. You would not save $3,677.70 in taxes, because with the deductions of $15,300 + $7,000 + $7,000 = $29,300 above, if you top up so much, you’re going to get bumped down into the next tax bracket of 7%.
• Plus I don’t know how anyone who earns $120,000 can afford to put away $60,000 that can’t be touched until the age of 55, minimum (and you know they’re gonna raise that age every few years right)? We all got bills to pay ya’know.
• So let’s just ignore this. [2019 Edit: if you’re self-employed, please don’t ignore this.] But again, PM me if you’d like to find out more. There are definitely situations in which this is worth considering.
• [2019 Edit: this stacks with II and II above.]

V. [2019 Edit: Donations to Institutions of A Public Character (IPCs)

• Donating to an IPC allows you to claim 250% tax deductions. For example, if I donate $1,000 to Methodist Welfare Services, I can claim $2,500 in tax relief. This is massive.
• If you have a yearly donation goal / target anyway, consider this seriously.
• Tax deductions under this section are not subject to, and do not add to, the personal income tax relief cap of $80,000.]

VI. Thank you for your contribution to nation building.

Edit: P.S. this is not legal advice, for general information only, etc etc, you know the drill.