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Reduction by deductions

By Finbar Garcia

LUTCF, FSS, MFA

Reduction by deductions. What does this mean? Here are the definitions.

Reduction: “Action or fact of making something smaller or less in amount.”

Deduction: “The action of deducting or subtracting something.”

We all want to enjoy some type of reduction or deduction, but in a positive way, when it pertains to our finances or incomes.

The taxes we pay on our personal incomes are referred to as PAYE: Pay As You Earn. Over the years, the system allowed us a Personal Allowance deduction, which is the first deduction we use to calculate the taxes to be paid on the remainder of our annual income.

This allowance has been increased over the years and is currently pegged at $90,000 per year, which means that the first $7,500 of your monthly income is not taxed; whatever remains will be taxed at the current tax rate of 25 per cent. While this exposed amount may not be large for some persons, it still has to be taxed.

What about those persons whose income is much larger? What other deductions can be applied to reduce the tax liability. Let’s look at some of them. While all may not be applicable, they are there based on certain life situations.

 

First-time Homeowners

This deduction is allowed for purchase or construction of a house to be used as your residence. Claims are limited to $25,000 and will be granted for five years from the year of acquisition.

These are the supporting documents that you will need, but not limited to: Statement from Financial Institution; Completion certificate if you had constructed your house; Deed of Conveyance, if there is joint ownership, then a letter from the co-owner stating the amount being claimed for the given year and their identification.

 

Tertiary Education

This deduction is primarily for the parents, whose children are attending full-time university outside of Trinidad and Tobago. Expenses are limited to TT$72,000  per household, so if you have more than one child attending university abroad, the maximum is $72,000. Documents required are: detailed statement of expenses incurred during the current year and a letter of acceptance from the institution, evidence of remittance of funds, like copy of bank drafts, receipts, or wire transfers.

Contributions to Approved Pension Fund Plans, Approved Deferred Annuity Plan, Government Widows’ and Orphans’ Fund, Tax Incentives savings plans and your NIS (70 per cent)

These can be used as a deduction based on the contributions or premiums paid during the year but are limited to $60,000 per annum. This area is where most persons will invest for a better retirement, while enjoying the tax reduction during their earning years.

So, it’s not limited to a certain number of years, but for all the years you are gainfully employed, while building your retirement funds. If you are currently working and have not yet started any retirement programme, you will be in some difficulty later on in life, as retirement planning is an age-based process, so the longer you take to start saving, the more you will have to invest to get the same result as if you had started at a younger age.

 

Alimony/Maintenance

While this is another area that can be used to reduce your taxes, it’s not as simple as it may sound. If you are a divorced person or an individual who was taken to court for alimony or child maintenance, then you will have to show proof of the court order and evidence of payments made.

Like any income received, tax must be paid, so you will have to furnish the Board of Inland Revenue with the court order, date of order, name and address of the recipient, BIR number of the recipient and amount payable.

The amount payable is usually decided on by the courts and is registered in the court order. There are certain conditions that may alter the duration of the order, but this is on a case-by-case basis.

 

NIS (70 per cent)

This is part of a broader area of deductions mentioned before. Your NIS is based on earnings. The system is designed to calculate your contributions based on the earnings band you are currently in, so it will vary from person to person.

With the possibility of the retirement age for receipt of your NIS pension being moved to age 65, you should consider pumping up your personal retirement programme and max out the tax benefits if you can.

If the private sector employer’s age of retirement is age 60, and your NIS is age 65, then there will be a window of five years with a reduced combined retirement income. This can put persons in a difficult position if they have not planned properly.

There are other areas of tax incentives that can be used, which are:

  • Venture Capital
  • CNG and Cylinder Kits for your motor vehicle
  • Solar Water Heating Equipment
  • National Tax-Free Savings Bonds.

These we will talk about in detail another time, as you consider the options I just mentioned.

Quote: “When we change our mindset, we change our reality” …Mastering law of Attractions.

Call me for more information on planning your financial future. Send your questions to myfinancialadvisor2020@gmail.com or call 620-1185.