Sunday 19th February, 2006

 

Make something of your tax relief

 
 
 
 
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The tragedy of Shakespeare’s King Lear, begins when one of his three daughters, Cordelia, tells him that she desires nothing of his kingdom. In response to which was his profound axiom: “Nothing will come of nothing!”

Let us look at how we can utilise, to the max, the small tax savings we have all realised because of the budgetary provisions for this year, and make something from something!

The first thing to note is that budgetary provisions are at best good for 12 months. So we will first examine a 12-month scenario, and see how to effect a plan to make somebody better off financially, sometime in the future.

Assume a monthly income of $6,000 or $72,000 for 12 months. According to the tax provisions, the first $60,000 is tax exempt in the form of a personal allowance. For this exercise, we will ignore NIS contributions and assume no other claims.

When we filled our tax returns last year, we had a personal tax allowance exemption of $25,000. Comparing the two years and assuming the same gross income in the first case, 2006; you pay tax on income in excess of $60,000; whereas in the latter case, you pay tax on income in excess of $25,000.

The tax rate is now 25 per cent across the board. Based on this provision for 2006, the tax due is calculated viz: $72,000 less $60,000 = 12,000 at 25 per cent, and amounts to $3,000.

Previously, the tax due on the same income would have amounted to some $12,850, assuming that tax on the second $25,000 is 25 per cent (the first $25,000 is tax exempt) and tax on the next $22,000 is at 30 per cent.

The net gain to this taxpayer, based on the new personal allowance is, therefore, some $9,850, for the year.

Let us look at a second scenario, assuming that you have a pension/annuity claim together with NIS, for every year, equal to $12,000.

IN 2006, you pay absolutely no tax, and in the earlier year, your tax would have been reduced from $12,850 to $9,250.

Regardless of your personal scenario, if you saved $5,000 this year only, in a savings plan at a rate of return pegged at six per cent, your money will double every 12 years, without compounding.

If you add the concept of compounding, in 25 years, that single sum will grow to roughly $22,000.

If you select the more attractive savings vehicles in today’s market with rates pegged at 10.5 per cent, in 25 years time a single payment of $5,000 will grow to some $60,000.

Why do you want to set aside a little bit of money for 25 years? It’s called three-legged stability: some for the short term, some for the long term, and some for the middle.

Imagine that that you have the discipline to set aside $5,000 each year into the same plan, then in 25 years, you’ll be a half-millionaire.

Imagine again that you can exercise the discipline of setting aside $5,000 twice per year, then in 25 years, you’ll be a millionaire!

The principle is humming with the concepts of deferred gratification, having a vision, and discipline.

Ten thousand dollars per year is really $27.40 cents per day.

Some say it is a better choice to select financial institutions that do not lend your money at exorbitant rates of interest, but which institutions invest your money directly into enterprise?

In any event, if you do nothing about your financial state of affairs to improve your condition, nothing will come of nothing and the welfare system is woefully inadequate.

©2005-2006 Trinidad Publishing Company Limited

Designed by: Randall Rajkumar-Maharaj · Updated daily by: Sheahan Farrell