You will be able to explain how the cap on total personal reliefs changes what each further relief is worth.
Shu Ting's manager, Raymond, is 45, earns well, and claims almost everything on the IRAS list. Two children, both parents, NSman Relief, a CPF top-up to himself every December and an SRS contribution every year. When he heard Shu Ting talking about her relief list at lunch, he said he'd stopped thinking about reliefs years ago because he "maxed out everything". She asked whether he had ever checked the cap. He hadn't.
This lesson explains the cap on total personal reliefs, what happens when you reach it, and why it changes the order in which you should make relief decisions.
IRAS caps the total personal reliefs one person can claim in a year of assessment. The relief cap covers every personal relief together: Earned Income Relief, CPF relief, the family reliefs from module 2, NSman Relief, CPF top-up relief, relief for MediSave contributions and SRS. The figure is set by the government and published by IRAS. Look it up for the year you are planning.
The cap isn't a limit on any single relief, since each of those has its own limit. It sits above all of them. If your reliefs add up to more than the cap, IRAS allows the cap and ignores the rest.
For most people in their twenties and thirties, the cap is far away, and this lesson is a quick check rather than a problem. It starts to bite for higher earners whose compulsory CPF relief is already large and who add family reliefs, top-ups and SRS on top.
Lesson 1.1 showed that a relief is worth your marginal rate. That is true up to the cap. Past it, the extra relief is worth zero, because it never reaches your chargeable income.
This is where people lose money without noticing. A CPF top-up made only for the relief still locks the cash away for decades, even if the relief has stopped counting. An SRS contribution made only for the relief still ties the money up until your statutory retirement age, and its withdrawals will still be taxed. If the relief isn't there, those decisions have to stand on their own.
Raymond ran his list. In this example, his reliefs before any voluntary ones came to S$6,000 below the cap. He was planning a S$10,000 SRS contribution, a S$5,000 top-up to his own CPF and a S$4,000 top-up to his father: S$19,000 of relief in all. Only S$6,000 of it would count. The other S$13,000 would save nothing.
Not everything that lowers your tax is a personal relief.
Donations to approved IPCs, from lesson 2.4, NSman, life insurance and donation deductions, are deductions. They come off your income before reliefs and don't count toward the cap. Rebates, such as the Parenthood Tax Rebate from lesson 2.2, come off the tax itself after it has been worked out, so they sit outside the cap as well. A one-off personal income tax rebate in a Budget year works the same way.
IRAS's pages say whether each item is a relief, a deduction or a rebate. When you're near the cap, that label tells you whether an item still helps.
The cap doesn't care which reliefs came first. The total is what counts. But it should change the order in which you make your decisions.
Start with the reliefs that cost you nothing extra: Earned Income Relief, CPF relief on compulsory contributions, and reliefs for family members you already support. You'd claim those whatever happened. Add them up and see how much room is left below the cap.
Only then turn to the voluntary reliefs, the ones that need you to lock money away: CPF top-ups, MediSave contributions and SRS. Fit them into the room that's left, starting with the ones you'd make anyway for their own sake. A top-up to a parent whose CPF LIFE payouts are thin might stand on its own. An SRS contribution you were going to invest for retirement might too. A top-up you were only making for the tax should come last, and drop out first.
Raymond went through it that way. The top-up to his father came first, because it raised his father's payouts and he would have done it anyway. That used S$4,000 of his S$6,000 room. He then had S$2,000 left. He decided to make an SRS contribution of S$2,000 that year and skip the top-up to his own CPF, which he had only ever made for the relief. He also noted that his room would grow again if any of his family reliefs ended, for example when a child turned old enough to stop qualifying.
If you built the relief list in lesson 2.5, List every relief you qualify for, add up the reliefs you expect for next year. Then open the IRAS page and compare your total with the current cap. If you're far below it, you can stop worrying about it for this year. If you're close, the room you have left is the number every top-up and SRS decision in the rest of this module has to fit inside.
For the activity, write your total, the current cap and the room left between them.
Add up your current reliefs and write how much room is left below the current cap.
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