Sunday 22nd January, 2006

 

Income tax deductions in 2006

 
 
 
 
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The term TD1 is an abbreviation for Tax Declaration Form 1, under the tax rules of Trinidad and Tobago. Tax laws require that all employees submit an approved TD1 to their employers.

Only the Board of Inland Revenue can approve a TD1, and it serves to vet the claims of the taxpayer for tax deductions. The onus is on the employer to secure from the employee such an approved declaration.

There has been more than a little confusion about the removal of certain claims for income year 2006, and what can still be claimed on an approved TD1. We will look at some of these now.

n In terms of individuals who are resident: pension and annuity contributions up to TT$12,000 are still a valid claim for 2006 income deductions. Claims for National Insurances (NIS) contributions are also lumped into that $12,000 figure.

n The total amount of contribution that can be claimed from a retiree, who no longer pays NIS, is $12,000. For people who are still paying NIS, the NIS percentage is subtracted from the $12,000 maximum.

n Many retirees fail to recognise that their pension cheques constitute emolument income, and they can still claim a tax shelter of $12,000 for 2006, and thus reduce the amount of taxes being deducted from their pension.

n If the gross amount of pension is less than $60,000, then the individual will not be paying any taxes.

n Retirees who still pay taxes, the tax benefit of contributing $1,000 per month into a new annuity, that will mature at age 70, or say, five years down the road, is compounded by the relatively high rates of investment returns that can potentially be earned from available annuity plans.

Based on experience, it is safe to say that retirees who consume their entire pension cheques each month will need recourse to a second source of income within five years of the start of retirement.

This is easy to see, if one examines the price of the basket of food, from both the market and the grocery, two years ago, against today’s prices.

Lump sums set aside, whether gratuity or savings, are generally consumed on big ticket items, and are seldom converted into a stream of income to supplement the pension cheque.

If you are unable to save from the pension cheque, you will need to convert the lump sums into structured pension plans.

Nowadays, the average number of years spent in retirement is 20–25, and that’s a long time to live off the same pension cheque.

The other claim that remains available is for alimony, up to 100 per cent of payments.

In order to claim alimony payments you will need to take the court order as well as evidence of payments to the BIR officer.

In terms of annuity contributions you will have to take the approved policy page—it is usually safer to take the whole policy contract as well as an official statement of contributions made in the past year. This statement is requested as evidence that the annuity plan is not dormant, and prevents the taxpayer from exploiting the tax benefit.

In terms of pension plan contributions, the pay slip tends to be sufficient evidence of contributions.

Of course, all individuals now have a single tax rate of 25 per cent on chargeable income. Chargeable income is calculated by subtracting the personal allowance, annuity / pension / NIS, and alimony from gross income.

To file Tax Returns you will need the TD4 Certificate. This declaration form is issued by the employer and is due on February 28.

Continued next week

 

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