How to Maximise Your Tax (or is it minimise?)
In this world, nothing is certain except death and taxes.
Benjamin Franklin
Since I started working more than 10 years ago, I have been obsessed with maximising my tax (or is it minimising?). In short, I want to pay as little tax as I can!
However, Singapore has a very straightforward tax system. Unlike USA, Singapore does not have capital gains taxes and we are unable to offset any losses. The local tax system is quite straightforward of WYSIWYG.
How to reduce the taxes?
Broadly there are two ways to reduce the taxes. 1. Charity 2. Contribution to Retirement Fund. So in this article, I will discuss how I reduce my taxes via the Contribution to Retirement Fund.
SRS
The US 401k-equivalent in Singapore is known as the Supplementary Retirement Scheme (SRS).
The attractiveness of this scheme is that all the funds added to SRS will be tax exempted! However, it could only be withdrawn when you are 62 years old. (Therefore you should make sure that you are using funds that you do not need in the near term.)
Before you get too happy and think of adding a lot of cash to SRS. The 2021 annual limit for local is $15,300 and foreigner is $35,700. (The government is not stupid)
How does SRS work?
For example, if your annual income is $160k, your original income tax would be $13,950 (ouch!). However, if you contribute fully to the SRS, your reduced income tax would be $11,655! Tax profit of $2295 🙂
Therefore, the way I view SRS is a form of investment. By investing $15,300, I will immediately get a return of $2295. That is a profit of 15%!
But that’s not all! The funds in SRS can be further used to invest in a variety of assets such as equities, funds and bonds. If you just invest the SRS funds in the US S&P 500 index fund which traditionally return 9% annually. Your total return will be 15% + 9% for the first year!
CPF Top Up Scheme
In addition to SRS, you can also top up to the other retirement scheme in Singapore known as Central Provident Fund (CPF). CPF is a mandatory scheme that all employees must contribute.
The cool thing is that if you top up your CPF in addition to what is mandatory, those funds will be tax-exempted too! There is a limit to the contribution. ($7k annual limit)! So do check it out before you top up too much (but don’t worry, excess top up will be refunded).
Another interesting point is if you top up your loved ones’ CPF, you can receive tax deduction too! So in total you can top up to $14k annual limit ($7k for yourself and $7k for loved ones)
Tax Deduction Limit: There is a $80k tax deduction limit so if you are topping up both your SRS and CPF for tax exemption, do make sure you have not hit the $80k overall limit.
What did Pete do?
So this year I will max out all my taxes deduction again.
- SRS – $15,300
- CPF top up to – $7,000 (unfortunately, my CPF hit the limit so I could only top up for my loved ones)
Total tax exempted contribution is $22,300
Based on this year income assessment, I predict the tax profits will be around $5,000! That’s a whopping 22% return on my total contribution! Furthermore, I intend to invest them! The return will be boosted by another 10-15% too!
Coupled with the tax-exemption, it is really hard to beat this kind of returns. Which is why I am contributing religiously every year. It also served as a disciplined investing that I do yearly, no matter rain or shine!
Hope you find this useful! Remember to share it with others so everyone can pay less tax!
Hi Pete,
A working mother will receive working mother’s child tax relief (WMCR) which is 15% for the first kid and 20% for the second kid. In my case I would have maxed out my 80K tax deduction limit with my 2 kids. Would you still recommend to contribute to SRS? Thank you.
Hi Priscilla, if you already max out then there is no need to contribute