Thursday, April 07, 2011

Personal Finance Part 22 – Filing Your Income Tax

It’s that time of the year again for all Singaporeans to file their income taxes, and always note that you are filing income taxes for the preceding year, but the year of assessment is always the year AFTER the year in question. Confused? YA 2011 refers to income drawn in calendar year 2010, and YA 2012 will refer to income drawn in calendar year 2011, and so on. I realized that some people get confused over this, so it’s better to clarify it early in this post. The rest of the post will deal with common issues with tax filing, some confusion over common deductions and also discuss the current tax regime and the changes introduced by Budget 2011.

Before I begin, here are some very important acronyms and terms:-

ECI = Estimated Chargeable Income (this represents the income subject to taxation after deduction of all reliefs from earned and business income)
NOA = Notice of Assessment (sent to all taxpayers to display the tax computation and to inform them of the tax payable and due date)

Reliefs = Deductions to ECI. There is a whole list of these and it can be daunting but IRAS has included a lot of assistance, explanations and help for each item. Just click on the “I” button beside each deduction for more information on whether you qualify.

Rebates = A direct deduction from tax payable. For YA 2011, there is a one-off 20% tax rebate for all taxpayers, meaning you only have to pay 80% of your computed tax payable. Some rebates, like Parenthood Tax Rebate, can be carried forward to future YA if there is an unutilized portion.

The deadline for filing your income tax this year is April 18, 2011, and this is an extension given by IRAS (Inland Revenue Authority of Singapore) for those who have problems filing or getting their IR8As together. Incidentally, an IR8A is a document which is issued by the Human Resource of each company to employees to state their gross salary, bonuses and CPF contributions in the preceding year. If one had changed jobs during the year, then you will need IR8A from all your employers in order to properly file your income tax. Some employers are included under IRAS’ auto-inclusion scheme, which means there is no need to manually key in the numbers – they are already updated when you login to file your income tax using your NRIC and Singpass. Below please see the tax brackets for YA 2011:-

Confusion sometime arises from the income section of the tax filing (I am referring to the e-filing screen and not the paper version). I will touch on the main sections of other income which I feel will impact some folk, that is rental income. Rental income has to be declared now that HDB has gazetted that ALL home owners have to register due to loan shark activity (I am not sure about private apartments, can someone clarify?). So simply take rental income for the year 2010 and minus out all mortgage loan interest paid during that year, and also less out any incidental expenses relating to the rental (you would need to retain proper documentation to prove this in case IRAS launches an audit) and the property taxes paid. Dividend income is NOT taxed any longer as all Singapore dividends are one-tier tax exempt, while interest income from deposits placed with approved banks like POSB are also exempted from income tax.

For deductions, please note that some deductions will be automatically computed, like donations to CDAC and SINDA, CPF Top-Ups, NS Man Relief and Earned Income Relief, while others like foreign maid levy, parent relief and Course Fee Relief have to be manually entered. Some important points to note on the following reliefs (I shall just touch on the more common and important ones):-

1. Donations – Donations to approved institutions (IRAS has a list) get a 250% relief. This means every dollar donated with result in a deduction of $2.50 from ECI, which is a benefit given to encourage more people to donate generously!

2. Qualifying Child Relief – All parents can claim this $4,000 deduction if their child is below 16 and earning less than $4,000 per annum. Note that if your child is handicapped the amount rises to $5,500.

3. Parent Relief – This part is kind of tricky, because note that for each parent, only ONE claim can be made on that parent by any child. To give an example, assuming you have two parents who are not working and earning less than $2,000 a year; and you have 2 siblings (total = 3 children claiming). If each of your siblings makes a parent relief claim on your mother and father, this means you CANNOT claim parent relief at all. I also found out that if your father claims wife relief on your mother, then the children are NOT allowed to claim parent relief on their mother as well. Silly rule, but IRAS has sent warning letters to me on this before, so I thought I should highlight this.

4. Course Fees Relief – This is an incentive given by the Government to get people to upgrade themselves. The total relief per year of assessment is $5,500 and one should retain all receipts of payments made as proof if IRAS demands an audit.

5. Foreign Maid Levy – Sadly, only working women who have children can claim this relief, and the relief is not available to men! You can claim twice the amount of levy paid, which is either $4,080 if you pay $170 per month (concessionary) or $6,360 if you pay $265 per month.

So after all that, it does not seem as daunting as before eh? Filing income tax is actually a breeze if you have all the relevant documents and numbers with you when you login, and can be done in less than 15 minutes (I e-filed on March 24 in less than 20 minutes for me and my wife).

Of course, in my case, since I have the Parenthood Tax Rebate of S$5,000 to play around with (and it can be distributed in any ratio between me and my wife), it is likely that I can avoid paying income tax again for YA 2011. For YA 2012, as a result of Budget 2011, the tax brackets were further lowered for low and middle-income groups, while keeping the top tier tax bracket constant at 20%. See table below for details:-

So, how much income tax do you think you will have to pay for YA 2011?


la papillion said...

Hi mw,

More of such posts pls! Helps accounting idiots like me to learn something, haha!

Musicwhiz said...

Hi LP,

Haha! Yes don't worry I will be posting more of such topics in future. Glad that it helps.


Ken Tan said...

Great posts! Thanks MW!

We need such insights when comes to income tax filing and what to look out for. :)

Musicwhiz said...

Hello Ken,

You're most welcome. I decided to do this post when a colleague of mine started asking me 101 questions on filing income taxes, and she's supposed to be accounting-trained! So I guess this once-a-year exercise can be quite tedious and frustrating for people who are unsure of various aspects of tax filing. Though I didn't go into details such as Working Mother Child Relief (WMCR), I hope I've at least covered the basics for most people.


XuCloudy said...

Hi MW,

Good post.
How about the capital gain/loss?
How about CPF top up?


Musicwhiz said...

Hi XuCloudy,

Capital gains are NOT taxed, therefore neither can you claim deductions for capital losses.

As for CPF Top-Ups, they should be automatically reflected in the Consolidated Tax Statement, up to a maximum deduction of S$7,000.