Avoid paying too much income taxes

Income taxes are a financial burden to working individuals. It is essential is to recognise that there is a way to lessen this burden by maximising the tax reliefs claimable for each assessment year. From Year of Assessment (YA) 2018, the total amount of personal income tax reliefs which you can be allowed is subject to an overall relief cap of $80,000.

Most people generally confuse tax relief with tax rebate. A tax relief is deduction from the total income to derive your chargeable income, whereas tax rebate is deducted from the actual taxed amount.

Chargeable IncomeGross Tax payable Chargeable IncomeIncome Tax rateGross Tax payable
First $20,000$00%$0
First $20,000$0Next $10,0002%$200
First $30,000$200Next $10,0003.5%$350
First $40,000$550Next $40,0007%$2,800
First $80,000$3,350 Next $40,000 11.5%$4,600
First $120,000$7,950 Next $40,00015%$6,000
First $160,000$13,950 Next $40,00018%$7,200
First $200,000$21,150 Next $40,00019%$7,600
First $240,000$28,750 Next $40,00019.5%$7,800
First $280,000$36,550 Next $40,00020%$8,000
First $320,000$44,550 Next $40,00022%

Why is maximising your tax reliefs significant? An individual who earns $320,000 would have to pay $44,550 in income taxes alone. If he manages to maximise the tax reliefs of $80,000, the income taxes is reduced to $28,750 (a saving of 35% in taxes). An individual who earns $120,000 reduces his taxes from $7,950 to $550 with maximum tax reliefs (a savings of 93% in taxes).

Do note that the tax rate increases the higher amount you earn. The whole objective is to move down a lower tax bracket.

The Ministry of Finance (MOF) website does a good job in elaborating the quantum and objectives of each tax relief. I reviewed the tax reliefs that I have claimed for YA 2018 and noted down how I could have done better for next year.

The total tax reliefs was $46,072 (only 58% claimed). Was it good enough? No. Could it have been better? Yes, definitely. How could I have improved it?

Tax ReliefsQuantumObjectives
Relief for cash top-up of own CPF Special / Retirement AccountMaximum S$7,000 a year To encourage Singaporeans to save for their retirement.
Relief for Supplementary Retirement Scheme (SRS) contributions Maximum S$15,300 a year To encourage Singaporeans to save for their retirement.

A top-up to both SA and SRS to the max will increase the tax reliefs to $68,372 and essentially bring me down from 7% to 3.5% bracket. This is of course the ideal scenario. However based on current cashflow, I mentioned about being comfortable to commit $100 to SA each month. $1,200 though small, is still a good start.

Looking at some of my other family members, I could tell that there are more ways to reduce their income taxes than what is currently being claimed.

For all working adults, it is good to mark out what claims are eligible to claim for each YA and work on it diligently. You should also find time to do the same for your family members for those who are less savvy on tax matters.

Simulating the compounding of SA from young

I initiated the top-up of my child’s SA in September 2019 to kick off the power of compounding interest. A monthly $100 top-up is a small but steady way in building up her assets. To reiterate, the first $60,000 of combined balances (with up to $20,000 from the OA) earns an extra 1% interest.

It will be a long way before the first combined $60,000 is reached. This also means every top-up earns 5% p.a.! It is too good a deal if parents start young enough. Do note however, it is essential to top up what you can afford as it is a one-way transfer till a good 55 years later.

How would this work out for my child if I were to do that till she reaches the adult age of 21 at the end of year 2038? In this case, MA and SA both earn 5% interest as they are well below the combined balances of $60,000.

YearMASATotal
2019$4,136$504$4,639
2020$4,342$1,756$6,099
2021$4,559$3,072$7,630
2022$4,786$4,452$9,238
2023$5,024$5,901$10,925
2024$5,274$7,423$12,697
2025$5,537$9,020$14,557
2026$5,812$10,697$16,510
2027$6,102$12,458$18,559
2028$6,406$14,306$20,711
2029$6,725$16,246$22,971
2030$7,060$18,282$25,342
2031$7,411$20,421$27,832
2032$7,780$22,665$30,446
2033$8,168$25,022$33,189
2034$8,575$27,495$36,070
2035$9,002$30,092$39,094
2036$9,450$32,819$42,269
2037$9,921$35,681$45,601
2038$10,415$38,685$49,100

With a total top-up of $23,300 over the years, she will have a combined balance of $50,000 when she starts work in society. This first $50,000 will continue working hard for her at 5% p.a.

Mortgage rate is killing me

So ever since we initially gotten a home loan in November 2017, interest rates have gradually been creeping up on us. In a blink of an eye, Maybank had raised its Fixed Deposit Mortgage Rate (FDMR) from 1.20% to 2.05%, which is about a 70% increase.

MAYBANKFDMR36
+0.08%
FDMR36
+0.18%
FDMR36
+0.28%
Revision fromFDMR361st Year2nd Year3rd Year
17 APR-192.05%2.13%2.23%2.33%
26 JUL-181.80%1.88%1.98%2.08%
20 MAR-181.40%1.48%1.58%1.68%
NOV-171.20%1.28%1.38%1.48%

This also means that what I could have enjoyed a low interest rate of 1.38% is now 2.23% in my second year. There was a need to tackle this now. So I did a comparison in the market on what is available and settled on a 3-years Fixed with UOB.

UOB1st Year2nd Year3rd Year
Sep-191.98% Fixed1.98% Fixed2.08% Fixed

The climate seems uncertain on the direction of SIBOR/SOR movement in the near future, thus far I am not taking any chances by locking into 1.98% for now. This translates to about $200+ of savings in monthly installment from what we are paying currently.

Moreover, should interest rates lower in the next year or so, the contract allows us one free conversion of interest rate. For folks who miss out on home refinancing, it is good to periodically monitor the end of your lock-in period and shop around for cheaper interest rates in the market.

Personal insurance coverage

I have covered the insurance coverage for my child in an earlier post and thought to do the same for myself. Technically, I recognise that I have a young dependent and housing as a big ticket item. In the case of my early dismiss, I need to ensure that at least the housing loan is settled and some monies to go towards the care of her. It is more than sufficient to bring her up on one parent’s income with the big ticket item taken well care of.

Insurance Type

TypeNamePremiumRemarks
Hospitalisation
Aviva MyShield Plan 1 + MyHealth Plus Option A
$209.00*Annual for lifetime
Private Hospital Standard room, cover co-insurance only
Critical IllnessAviva My MultiPay Critical Illness Plan III $780.50Annual till 75
Sum Assured $50,000
Accident PlanSompo PA Star Standard$101.65*Annual till 85
Disability IncomeAviva IdealIncome$539.24Annual till 65
$4,000/month income
Term LifeSAF Group Term Life Insurance$123.00Annual till 65
(optional till 70)
Sum Assured $250,000
Term LifeDirect – Etiqa Term Life$412.00Annual till 65
Sum Assured $400,000
Term LifeDependants’ Protection Scheme$36.00*Annual till 60
Sum Assured $46,000
Term LifeGroup Term Assurance Scheme$0Covered during hire tenure
Sum Assured $150,000

*Premiums are subjected to annual revisions

One insurance type which I do not see being discussed often or even recommended is Disability Income. DI kicks in when you are temporarily unable to work at your trade due to an illness or accident. It pays you a fixed amount each month to replace the income you lose. It has a different meaning to losing an arm or leg or permanently incapable of working due to a physical disability. Having worked through how much I need minimally each month to live comfortably, this is the amount that I am willing to pay to insure myself.

Is this insurance coverage sufficient for myself? It is good to set a basis to work against for the coverage for oneself. While it has not reached the optimal level, I daresay this is the level I am comfortable to risk versus what I am currently insured for. As life goals change, it is an area which I will come back to look at annually.

Insurance coverage for my child

I am a strong advocate of Buy Term Invest the Rest (BTIR). Insurance coverage in my opinion, should be bought to cover the unexpected negative events that happen in life. This may include unforeseen death, illnesses or injuries. Savings and investment should take a separate track.

Insurance Type

TypeNamePremiumRemarks
HospitalisationAviva MyShield Plan 1 + MyHealth Plus Option A$76.00*Annual for lifetime
Private Hospital Standard room, cover co-insurance only
Critical IllnessAviva My MultiPay Critical Illness Plan III$752.00Annual till 75
Sum Assured $100,000
AccidentSompo PA Junior Bunny$85.60*Annual till 21/25
EndownmentAviva MyWealthPlan$4,073.85Annual
LPP 10 years / 20 year plan

*Premiums are subjected to annual revisions

Is the insurance coverage sufficient for her? Well probably yes, at this current stage in life. The essentials are pretty much coverage until we review it again down the road.

Some people advocates purchasing Whole Life or even Term Life policies for their children now because it is cheap. First things first, coverage for death should be targeted towards liabilities that arises from the early dismiss of one. This may include outstanding housing loans, dependents such as young age school children or non-working homemakers. No matter how cheap the policy is, rationally, children do not need coverage for death as they have no dependents or liabilities.

You may observe that as a firm believer of BTIR, is it not contradictory having an Endownment plan? The Endownment plan is contributed by my wife who is not an avid investor but still wants to provide something to our child when she turns 21. The premiums paid after 10 years is $40,739. The guaranteed portion is $49,500 while the non-guaranteed portion is $8.377, calculated at 3.25% investment return.

To put into perspective the returns from the above mentioned Endownment plan:

PremiumsGuaranteedNon-guaranteedTotalAnnualised interest rate
$40,739$49,500$8,377 (written in policy)$57,8772.10% p.a.
$40,739 $49,500 $4,189 (if 50% of NG is met)$53,6891.59% p.a.
$40,739 $49,500 $0 (if 0% of NG is met)$49,5001.08% p.a.

I would conservatively estimate that at least 50% of the non-guaranteed portion is possible to be obtained. This translates to roughly 1.59% annualised interest rate over 20 years. Not the very best when you look at annualised returns instead of absolute numbers, however we will keep to this plan as her way of committing to forced savings for our child.

With the above data, this further reinforce why I would personally avoid Endownment and Whole Life policies for their returns.