A Simple Introduction to Taxes
Ever wondered how do you reduce your income tax? Well, the size of your tax bill is dependent on your income, expenditure, and deductions from 1 January 2021 to 31 December 2021. As the year has just begun, here are some ways to reduce your tax bill for the Year of Assessment 2022 (YA 2022).
With the implementation of the new Personal Income Tax Relief Cap in recent years, the policy “New In Year Of Assessment 2018: Personal Income Tax Relief Cap Of $80,000” limits the total amount of personal reliefs an individual can claim to $80,000 per YA. If the cap is already reached, taking further steps to boost personal reliefs will not reduce your tax bill.
This cap only applies to personal reliefs. Allowable expenses include Employment Expenses or Cost of Renting Out Your Property, donations, and other tax reliefs, and they do not fall under this cap. You can make use of IRAS’ income tax calculator to check if you will be affected by this cap, though according to IRAS, the “vast majority of taxpayers are unaffected by the relief cap”.
You might think that you should always max out as many deductions as you possibly can, but if doing so does not change your tax bracket significantly, you might decide that the effort and opportunity cost of taking certain actions may not be worth it.
Here are the basics of calculating your income tax in Singapore.
Firstly, assessable income. This refers to the total income you earn, and compromises of mainly our salaries. It also includes income received from part-time or freelance jobs, as well as rental income from properties. Do note that dividends from shares are not taxable and there is also no capital gains tax to pay.
The table below is a non-exhaustive list of what are the taxable and non-taxable items:
Next up would be chargeable income. This refers to the total amount that you would be taxed after deducting personal reliefs from your assessable income. As your chargeable income increases, you can expect your income tax payable as a percentage of your total income to increase.
To summarise, the formula is [taxable income] – [tax reliefs] = [chargeable income].
That sums up part 1! Stay tuned to find out what comes next on how you can reduce your taxable income!
– Gideon Boey (@gideonboey), Financial Services Consultant