It’s really crazy how it’s barely two months away from the end of the year. What a year 2020 has been, and all things considered I’m remarkably lucky to survive a pandemic relatively unscathed and having the fortunate problem of trying to find ways to cut down on the income tax for the year.
There are a few ways of (legally) reducing one’s tax bill, and here are some options I am exploring while I still have some time to procrastinate and sit on it. Perhaps some background to my goals would help: I wish to have the option to stop working at 45, I am self-employed, and I do not want to go away for tax evasion. Not sure I’ll bounce back from that as well as Fan Bing Bing because I am nowhere as pretty.
Topping up CPF Special Account
Making cash top-ups to my CPF SA allows me to reduce my tax bill by up to $7,000 a year. Instinctively, I would reject this option because of the nature of CPF withdrawals. Firstly, the current withdrawal age is 65, which is a little too far away for my comfort, particularly if I want to achieve my goal of FIRE.
Secondly, CPF rules tend to change and evolve with time, and as much as I’m quite supportive of CPF as a nationwide scheme, I would prefer not to add additional funds on top of what I am already contributing to my SA owing to the rather mercurial system that is sometimes more political than it is financial.
Alternatively, I could consider topping up to my parents’ SA accounts, and this too can be done for tax relief of up to $7,000 a year. This option is more compelling than topping my own SA since my parents are fast approaching 65.
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Voluntary top-up of CPF
As a self-employed person, I am also able to enjoy tax relief by making voluntary contributions to my three CPF accounts. Employees don’t qualify, since they already don’t pay tax on their mandatory CPF contributions.
This option is more attractive than topping up my SA since OA savings are a lot more accessible and I’m already using it for housing.
Supplementary Retirement Scheme (SRS)
SRS is a very interesting tool particularly for those whose incomes have a tendency to fluctuate (ie. me). While the scheme encourages you to hold the funds for the longer term, it doesn’t completely lock down your savings like CPF does. It is entirely possible to withdraw before the statutory retirement age (currently 62, and also decided at the time of account opening), just that you need to suffer a penalty of 5% on the withdrawn funds, and the entire amount is subject to tax based on the year you withdraw it.
This can work out rather nicely for someone whose incomes start to cross the brackets of 7% and up. At the 7% tax bracket, one already saves $700 for a $10,000 contribution to their SRS account. In a hypothetical year where income drops to the nothing – perhaps business is bad or they have lost their job – the person can withdraw $10,000 from their SRS and incur $500 on the withdrawal. There is still a net gain of $200, and obviously this amount grows with higher tax brackets.
If times are fine and dandy, SRS funds can be used for a variety of investments, and its liquidity is attractive for what-if scenarios, even if it does come with a cost.
As mentioned, finding ways to reduce one’s income tax is a fortunate problem to have, and giving money to charity seems like a rather fitting solution of sorts.
One would never be able to “earn” from this – every dollar you donate to charity saves you at most 55 cents (and that is if you are in the highest tax bracket), so this is not for people who are looking to save money.
We shouldn’t expect anything in return for being charitable, of course, but I personally see it as the government co-funding some of my giving efforts, and having some say in where my money goes rather than just giving it all in tax to the government. It is also a happy coincidence that there are ways to get card rewards from one’s charitable donations, but that is perhaps another article for another day.
What about you?
With barely two months to the end of 2020, how are you dealing with your tax this year? Let me know in the comments or the Telegram channel!
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