Print Page   |   Report Abuse
News & Press: Opinion

End of medical tax deductions won’t hurt all pensioners

09 March 2014   (2 Comments)
Posted by: Author: Laura du Preez
Share |

Author: Laura du Preez

Some pensioners are angrily accusing government of not caring about the plight of the elderly after it was highlighted in the Budget last week that over-65s will lose the tax deduction for medical scheme contributions and medical expenses in the 2014/15 tax year.

But, depending on their contributions, expenses and family size, the scrapping of the tax deduction is bad news only for over-65s who earn more than about R400 000 a year, National Treasury says. Those who earn less should be better off.

The implementation of the tax credits could affect the amount of pay-as-you-earn (PAYE) tax that some pensioners will pay at the end of this month. But many pensioners with an income of less than about R400 000 a year will benefit from the tax credits when their tax for the 2014/15 tax year is assessed in 2015.

Taxpayers under the age of 65 with a disabled family member who earn more than about R386 650 a year may also pay more tax when they are assessed after this tax year ends in 2015, Treasury says.

Taxpayers under 65 who earn more than about R270 000 a year will also pay more tax next year than they would have if they had still been able to claim a tax deduction for medical expenses not recovered from their medical schemes.

The introduction of the tax credits for over-65s is the final step in the phased implementation of the tax credit system, which replaces the deduction for medical scheme contributions and for expenses not recovered from a medical scheme. It was announced in the 2012 Budget.

A tax deduction reduces the taxable income on which your tax is calculated, while a tax credit reduces the tax you will pay after the tax has been calculated.

The deductions benefited taxpayers according to their marginal rate of tax, whereas tax credits are more equitable, because everyone benefits at the same rate, regardless of their income. This helps to make medical scheme membership more affordable for lower earners.

From March 1, a tax credit will apply to taxpayers over 65 for contributions paid to a medical scheme. These taxpayers may also qualify for an additional credit if their contributions exceed three times the tax credit. There is a third credit for expenses not recovered from a scheme.

Until February this year, over-65s could deduct from their taxable income all their contributions and unrecovered expenses. Those who proved to their pension providers that they were paying medical scheme contributions could benefit from the deduction for contributions when PAYE was calculated on their pensions.

Now, pension providers will be able to deduct the credit only for pensioners who prove they are paying contributions, David Warneke, a partner at tax and auditing firm BDO, says. This could affect you negatively if you are a high earner, but you may get back some of what you pay in now when your tax is assessed next year. (The 2013/14 tax year, the last tax year for which over-65s will be able to claim a deduction for all their contributions and medical expenses, will be assessed this year.)

The introduction of tax credits for contributions has benefited some taxpayers under the age of 65 – including those with a disabled family member – who earn less than R270 000 a year.

In the 2011/12 tax year, you could deduct R720 for contributions paid for the member and the first dependant, and R440 for each additional dependant, such as a child.

In the 2012/13 tax year, the tax credits were introduced for contributions paid by taxpayers under 65, including those with a disabled family member. The credits were at a rate of 30 percent of the rand amount previously allowed as a deduction for contributions, but adjusted for inflation.

The introduction of the tax credits for taxpayers under the age of 65 therefore resulted in those on a marginal tax rate of less than 30 percent paying less tax than they did under the tax deduction system, whereas those whose marginal rate was more than 30 percent paid more tax.

From March 1, new tax credits will also apply to all taxpayers for contributions that exceed certain amounts and for medical expenses not recovered from a scheme.

The additional tax credit could result in taxpayers under 65 on a marginal rate of less than 25 percent (annual income of up to R272 700 in the 2014/15 tax year) paying less tax than they did under the deduction system, but under-65s on a higher marginal rate could pay more tax, Warneke says.

Many taxpayers who belong to medical schemes are paying tax at a rate of 30 percent, and the tax credit rate is possibly too low, he says.

If a member of your family is disabled, the second tier of the tax credits system means you will pay more tax if you are on a marginal tax rate of more than 33.3 percent, but you will pay less tax if your marginal rate is below 33.3 percent.

Over-65s and families with disabled members, whose contributions have to exceed three times the tax credit before the contributions qualify for a further credit, may benefit from the widening gap between the tax credits, which increased 6.2 percent this year, and medical scheme contributions, which, in many cases, rose by almost nine percent or more on average.

HOW THE TAX CREDITS WILL APPLY

This is how the change-over to the tax credits system has affected, or will affect, different categories of taxpayer:

Taxpayers over the age of 65 (including those with a disabled family member) 2013/14 tax year

* A tax deduction for all medical scheme contributions; and

* A tax deduction for all qualifying medical expenses not recovered from a medical scheme.

2014/15 tax year

* A tax credit for medical scheme contributions: R257 a month each for contributions paid for the member and the first dependant, and R172 a month for each dependant thereafter.

* An additional tax credit of 33.3 percent of any contributions paid that exceed three times the tax credit for contributions. That is, 33.3 percent of all contributions above R771 a month for a single member, or R1 542 a month for a couple.* A further tax credit of 33.3 percent of all unrecovered qualifying medical expenses.

Taxpayers under the age of 65

2013/14 tax year

* A tax credit for medical scheme contributions: R242 a month each for contributions paid for the member and the first dependant, and R162 a month for each dependant thereafter; and

* A deduction for medical scheme contributions that exceed four times the tax credit and unrecovered expenses, but only to the extent that the total of these amounts exceeds 7.5 percent of your taxable income (excluding retirement fund lump sums).

2014/15 tax year

* A tax credit for medical scheme contributions: R257 a month for contributions paid for the member and the first dependant, and R172 a month for each dependant thereafter; and

* A tax credit of 25 percent of the total medical scheme contributions that exceed four times the tax credit and unrecovered expenses, but only to the extent that the combined total of these amounts exceeds 7.5 percent of your taxable income (excluding retirement fund lump sums).

Taxpayers under the age of 65 with a disabled family member

A different tax regime applies if you or one of your family members has a disability. The tax system that applied in the 2013/14 tax year has been tweaked again for the 2014/15 tax year.

2013/14 tax year

* A tax credit for medical scheme contributions: R242 a month for contributions paid for the member and the first dependant, and R162 a month for each dependant thereafter; and

* A tax deduction equal to all unrecovered expenses, plus those contributions that exceed four times the tax credit.

2014/15 tax year

* A tax credit for medical scheme contributions: R257 a month each for contributions paid for the member and the first dependant, and R172 a month for each dependant thereafter.

* An additional tax credit of 33.3 percent of contributions that exceed three times the tax credit for contributions. That is, 33.3 percent of contributions above R771 a month for a single member, R1 542 a month for a couple, or R2 574 a month for a family of four.

* A further tax credit of 33.3 percent of all unrecovered qualifying medical expenses.

EXAMPLES OF HOW THE CHANGE TO TAX CREDITS COULD AFFECT YOU

Here are some examples that show how the revised tax credit system may affect the tax paid by different taxpayers in the 2014/15 tax year.

The medical scheme contributions are either those of Momentum Health’s Extender option, for a high-income taxpayer, or its Incentive option, for a low-income taxpayer (both using network hospitals and chronic medicine providers).

We have assumed that the contributions will increase by nine percent from the current rates from January 1, 2015. We have also assumed that the taxpayers could not recover medical expenses of R20 000 from the scheme.

Taxpayer over the age of 65: high income

Medical scheme contributions: R67 891 for the year

Taxable income: Between R528 001 and R673 100 a year

Marginal tax rate: 38 percent

Tax saving if the deduction system had remained in place: R33 398

Tax credits: R29 274. This is R4 124 less than you would have saved had the tax deduction system remained in place.

Taxpayer over the age of 65: low income

Medical scheme contributions: R37 197 for the year

Taxable income: Between R174 551 and R272 700 a year

Marginal tax rate: 25 percent

Tax saving if the deduction system had remained in place: R14 299

Tax credit system: R19 052. This is R4 753 more than you would have saved had the deduction system remained.

Taxpayer under the age of 65: high income

Medical scheme contributions: R91 642 a year for a family of four

Taxable income: R550 000 a year (including fringe benefit for any subsidy)

Marginal tax rate: 38 percent

Tax credit for contributions: R10 296

Further tax saving if the deduction system had remained in place: R11 133

Tax credit for excess contributions and expenses: R7 325.50

This is R3 807.50 more in tax than you would have paid if the deduction for excess contributions and unrecovered expenses had remained in place.

Taxpayer under the age of 65: low income

Medical scheme contributions: R52 959 a year for a family of four

Taxable income: R250 000 a year

Marginal tax rate: 25 percent

Tax credit for contributions: R10 296

Further tax saving if the deduction system had remained in place: R3 256

Tax credit for excess contributions and medical expenses: R3 256.

You will pay the same tax that you would have paid if the deduction for excess contributions and unrecovered expenses had remained in place.

This article first appeared on iol.co.za.

Comments...

Philippus S. Jooste-Coetsee says...
Posted 13 March 2014
Gerda the new section 6B which came into effect from 1 March 2014 allows expenses previously claimed interms of section 18 (which has now been withdrawn) to claim all "excess" medical expenses. This is now also in the form of medical tax credits.
Gerda Dearlove says...
Posted 13 March 2014
How can taxpayers over 65 with no medical contributions (in other words, no credits on contributions) but having extensive medical expenses paid by themselves, claim any deductions on there taxable income?

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

MINIMUM REQUIREMENTS TO REGISTER

The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by YourMembership  ::  Legal