How I plan to lower my income taxes next year
I’ve recently received my Notice of Assessment (NOA) from IRAS and was really happy that my bill for last year came up to a grand total of $0. However, it’s highly unlikely that I can achieve the same feat this year as my income will be significantly higher. This set my brain running, thinking of the things I can do right now to lower my taxes for next year.
Here is the step by step run through of the exact actions I did. Gosh did I spent entire day during the weekend on this.
Predict my assessable income
The first thing I did was to predict my assessable income for next year. To get close to an exact number, its actually quite straightforward. In my monthly payslip, my YTD pay is always stated clearly. This includes any additional pay I get such as bonuses or taxable allowances.
Since it’s only June, I just have to simply estimate the rest of my earnings for the year and add them all up together.
Predict my payable taxes
Next, I needed to figure out how much taxes I had to pay realistically. Lucky for me, there are plenty of online tax calculators out there. The one I used is a free tool by Rikvin.
They also had columns to input my deductibles. I simply put in the same deductions as last year as I do foresee those to still be eligible for me. They are Parent Relief, CPF fund relief and NSmen (assuming my upcoming call up don’t get cancelled) relief.
I got a sticker shock when I saw that the amount payable was around $1800. Even though this amount is significantly lower than what taxes in other countries are, I decided that I needed to lower it way down.
Look for deductions
The next natural course of action is to look for more applicable deductions. There are a bunch of deductions available on IRAS’s website. However, many of them are not applicable to me. Only 2 stood out as the best ways to lower my taxes. CPF Cash Top-Up and SRS contributions.
CPF-Cash Top up
As Singapore citizens, we are automatically enrolled into the CPF scheme. On top of your our monthly 20% contribution, we can contribute up to another $7000 into our CPF Special accounts for retirement. This will in turn deduct $7000 off the assessable income.
There are pros and cons to this that can easily spend another article on. So I will probably do that. Just on tax savings alone, assuming I’m at a 7% tax bracket, this will already save me $490. Nice!
Supplementary Retirement Scheme (SRS)
To be perfectly honest, when I first heard about this scheme, I did not think much into it. I always had the impression that this will only be relevant to me much later on in my career when I’m earning the big bucks. It was only until I actually did the actual math that this is actually a very useful tool even at my current stage of life. This has to be by far my biggest takeaway out of this entire tax planning exercise. I eventually went down a deep rabbit hole about finding out the best ways to utilize my SRS for investments. I am definitely writing a future article on that.
For the uninitiated, the SRS system allows you to contribute up to $15,300 for Singaporeans and $35,700 for foreigners. The cool part is that the amount contributed will be wiped off your assessable income.
However, you can only withdraw the amount when you’re 62 years old. Also, if left uninvested, the money will only grow at 0.05% interest rate which is pathetic. Therefore you definitely need to invest the money some way or another.
This has changed my investment strategy entirely. Previously I was doing investments using cash that I have which will eventually be taxed. Now I could do the same thing, but use my SRS funds instead though I lose the liquidity.
After factoring my foreseeable SRS contributions, I can lower my income tax to a grand total of $550 for the coming year.
I have to say that I’m very satisfied with how much I can lower my income taxes with the sheer amount of available deductibles. Although many people will argue that contributing to retirement accounts will mean that my funds are locked up for a very long time, that is my investment strategy anyway. I always had the mentality of doing very long term investments for retirement.
I have a stash of cash and CPF OA available for my near term needs such as BTO and wedding. I’m really glad that I did this “short” tax exercise that saved me potentially thousands of dollars in the long term. Hope that this will inspire more of you to start planning your taxes early.