How to Reduce Income Tax

Published on December 27, 2016

It’s end of the year, the best time to prepare and plan for the tax you need to pay for the year.

You have little control of how much you earn, but you have absolute control of the tax relief you can get.

Here are some great ways to earn tax relief, in order of effectiveness, as of 2016.

1. Supplementary Retirement Scheme (SRS)

Contribute up to $12,750 to your SRS account.

I transfer as much cash to SRS, because whatever amount I put in my SRS, I will use it for long term investment.

For investment, I use Fundsupermart to buy unit trusts. They have some guides on making use of SRS on their platform.

2. Parent’s Special/Retirement Account

Contribute up to $7,000 to your parent’s CPF Special/Retirement Account.

You can contribute to multiple members in your family, but still cap to total $7,000.

The pros of contributing to your parent is:

  • They will be able to withdraw cash from their retirement account at 65 years old
  • The current interest rate is 5% for the accounts

Note: There is a condition to be given the relief - the Special/Retirement account must be below $161,000.

3. Your Special/Retirement Account

Similarly, you may contribute up to ANOTHER $7,000 to your OWN CPF Special/Retirement Account.

The only difference (vs contributing to your parent’s) is that you are younger, so you will not be able to withdraw the cash any sooner :(

There is another tax relief - contribution to Medisave Account. But the amount you may contribute is difficult to understand and computate. And if your Medisave account is already more than the Basic Healthcare Sum (aka Medisave Contribution Ceiling), which is $49,800 in 2016, than you can forget about this.

4. Donation

Donate to good cause, and enjoy 2.5 times the amount as tax relief!

There are many charities you can help. Personally I donate to these:

  1. Children’s Society
  2. Community Chest

There is no cap to the amount of relief from donation, so you could easily drop a tax bracket, and help others along the way!

Other Reliefs

There are many other reliefs and rebates, such as:

  • Attend courses $3,500 relief
  • Make babies $5,000-$20,000 rebate per child :)

Just be clear on rebate vs relief: Rebate is absolute deduction from the tax amount you need to pay, so is equivalent to one-time cash. Relief is deduction from the income.

Lastly, consider your cash flow

As you can see, all of the reliefs involve spending cash.

You need to consider your cash flow.

Cash itself is possible to generate returns too. My benchmark is 3% returns (investing in low risk, fixed income funds in Fundsupermart).