How you can be tax refund savvy this filing season

Feel free to reach out to PSG Wealth adviser Mariska du Plessis directly.

If you know what I am referring to you might be someone that has made use of tax rebates, credits and incentives in the past, but if that doesn’t sound familiar, now is the time to get some practical tips.

Let’s take a look at some of the ways in which you can maximise your tax deductions and incentives:

Retirement Fund contributions

When you contribute to a retirement annuity, you lower your taxable income. That means that you can pay less tax. Who would say no to that?

Tax deductions are limited to 27.5% of your taxable income, up to a maximum of R 350 000 per tax year. The limit applies to all your retirement savings combined. Don’t worry, if you exceed these limits, it will roll over for future deductions.

When you have made contributions to a Retirement Annuity, your service provider will issue an IT3(f) tax certificate at the end of the tax year, detailing the total contributions made. This will form the basis for calculating your tax refund when you submit your tax return.

If you really want to maximise your tax-free savings and refund, the smart thing to do is to reinvest the tax refund into your retirement annuity in the following tax year, thereby maximising your following tax year’s benefit.

Retirement Annuities remain one of the best ways to build long-term wealth and secure financial freedom in retirement. Did you know that not only are your contributions tax deductible, but all dividends and interest that is earned within the investment are tax-exempt, and no capital gains tax (CGT) applies to investment growth. This is a significant benefit over a conventional savings account or unit trust investment. Retirement Annuities are also protected from your creditors and can be a powerful estate planning tool since it falls outside of your deceased estate and can thus be used as a tool to reduce estate duty and executor fees on death. It is important to make sure that your beneficiary nominations are updated.

Tax-Free Savings Accounts (TFSA)

It is not often that SARS gives us tax “presents”, so when it is available, be sure to make the most of it. A Tax-Free Savings Account (TFSA) is an investment vehicle that enables you to grow your capital without paying tax on investment growth. It allows for flexible contributions up to a maximum of R36 000 per tax year and R500 000 over your lifetime, as per legislation, while giving you control over your choice of underlying investment options, but unlike a retirement fund your contributions are not tax deductible.

It is important to remember that the annual contribution limit applies to all TFSA investments in an individual’s name, and keeping track of your contributions if you have multiple TFSA’s remains your responsibility, in order to avoid a hefty tax penalty of 40% on excess contributions.

Your investment can grow beyond the R500 000 lifetime limit, and all growth remains tax free. As Albert Einstein observed, “Compound interest is the eighth wonder of the world” - the growth on growth in this investment holds the power of significant long term wealth creation. If you start now, you can reach the R500 000 limit in less than 14 years, and the longer you don’t touch your investment, the more tax-free growth it will accumulate. Also, take note that withdrawals do not increase your annual contribution limits.

This investment is ideal to supplement your retirement income as it allows you to actively structure your retirement plan and taxable income between your discretionary and non-discretionary investments and can cater for lump sum liquidity needs in retirement.

Other ways of maximising your tax refunds, credits and incentives include:

• Medical tax credits available in respect of medical scheme contributions for taxpayers under the age of 65.
• Contributing to a good cause by making donations to a registered Public Benefit Organisation (PBO) and getting a tax saving limited to 10% of your annual taxable income for that year.
• Strategically review and rebalance your discretionary investments to make use of your R40 000 annual capital gains exemption, although this possible tax savings should never be the main driver of your investment decisions.

As Robert Kiyosaki famously said: “Millions of educated people pursue their profession successfully, but later find themselves struggling financially. They work harder, but don’t get ahead. What is missing from their education is not how to make money, but how to spend money – what to do after you make it.”

I am a firm believer of the fact that your wealth is not determined by your salary. Your income is merely a wealth-building tool; what really matters is how you manage this tool.

Don’t hit the snooze button on your financial planning, discuss your needs with your financial planner today to maximise your tax refunds and give it a purpose beyond the initial pleasure.