’Tis The Season FOR TAXES

Are you one of those people who, when March comes around, feel overwhelmed by tax season? The truth is, nobody likes paying taxes; it is never on anyone’s top ten list of favourite things to do. Paying taxes feels like a significant portion of your earnings is being consumed outside of your control. Still, we all know the famous Benjamin Franklin saying — ‘In this life, nothing is certain except death and taxes’. While we dislike paying taxes, maybe understanding its importance, and learning some strategies to lessen how much you have to pay, will make you a little less anxious.

Why is paying taxes important?

Paying taxes is mandatory in Jamaica and takes many forms. Taxes are paid on income earned from salaries, capital gains on some securities, dividends or interest received on investments, and payments for goods and services, among other things. Income earners are normally liable to 25 per cent on chargeable income that doesn’t exceed six million dollars annually, with a tax-free threshold of 1.5 million dollars. However, the tax rate for income earners over six million is 30 per cent. For businesses, the corporate tax rate is 25 per cent. However, companies regulated by the Bank of Jamaica, the Financial Services Commission, the Office of Utilities Regulation and the Ministry of Finance and Planning are taxed at 33.33 per cent.

Given that taxes constitute a considerable portion of your salary and business earnings, it is common for many to view taxes as a burden. However, tax collection is essential for the Government. Taxes are the primary source of revenue for the government and are used to provide public goods and services to help maintain (and raise) living standards.

How do taxes benefit you?

Taxes are used to fund health care; education; public infrastructure; social development and welfare programmes; secure the country’s borders; fund the salaries and pensions of government employees; and pay principal and interest on government debt.

That said, we cannot deny how we feel about having taxes withdrawn from our incomes, or what many term the ‘tax burden’. This is where tax planning comes in.

What is tax planning?

With the country only just emerging from the COVID-19 pandemic and still grappling with the trickle-down effects of the ongoing Russia-ukraine war, it is safe to say that personal finances have been bruised. Further, cost of living has skyrocketed, while salaries, not so much.

Tax planning is key, like any other form of planning that affects your financial future. It helps you to take advantage of the permissible allowances, incentives, exemptions, deductions, to minimise your tax payments.

Let’s be clear, tax planning is not the same as tax avoidance or evasion, which are illegal. It is not an attempt to hide income from the authorities or flat-out ignore your legal obligation to pay your taxes. Conversely, it is about leveraging the concessions available within the parameters of the law to reduce — not eliminate — your taxes.

In the same way that corporate entities are granted concessions to reduce their tax bill (for example, companies listed on the Jamaica Junior Stock Exchange are exempted 100 per cent of corporate income tax for the first five years from the date of admission to the Junior Market and 50 per cent in the following five years) surely there should be concessions for individuals and small business people.

There are many.

In the recent budget presentation, the Minister of Finance and Planning, Dr Nigel Clarke announced that the Income Tax Act will be amended to incentivise households to purchase solar power generation systems. It will give a 30 per cent tax credit on the cost of these systems up to a maximum of $4m.

Another opportunity is a tax exemption provided by the Government of $80,000 per annum for individuals who retire before age 55 and receive income from an approved pension plan. This exemption, however, applies only to income received from the pension plan.

Another concession comes by way of your retirement fund. If you contribute towards a pension fund at your job, do you know that the portion of your income paid to the fund is not subject to taxes? If you pay more to the fund, you will pay less income tax. As of March 2008, when the Income Tax Act was amended, employees can contribute up to 20 per cent of their gross salary to approved pension or superannuation funds. Self-employed individuals can also benefit from this strategy to get the allowed tax deduction. Simply purchase an IRA (Individual Retirement Account) from a financial institution which operates an approved fund. In this case, the individual would be entitled to tax-free contribution of up to 20 per cent of their statutory income.

The additional bonus of this strategy is that you’ll be increasing your savings, and the amount available for investments, by putting away more money for your golden years of retirement, which is when you’ll need it most.

Therefore, although income tax payment can be your least favourite thing to do, it is crucial for the country’s functioning, and luckily there are tax planning strategies that can help you to reduce your taxable income. Further, employing effective tax planning strategies can free up more money to save, invest, or even utilise however you desire. Speak to a financial advisor to help you employ a strategy that is most effective for you.