Medical Tax credits may benefit you
29 November 2011
Posted by: SAIT Technical
Medical Tax credits may benefit you
Business Report - Laura du Preez
Members and potential members of medical schemes should remember, when weighing up the costs of a scheme’s options, that the tax subsidies for medical scheme contributions are due to change from March next year. For taxpayers under the age of 65, the subsidy will change from a tax deduction (an amount set off against your taxable income) to a tax credit (an amount set off against the tax you must pay), at a rate that is expected to make medical scheme membership more affordable for lower-income earners.
As the tax credit will be set at 30 percent of the current rand amounts allowed as a deduction for contributions, people who earn more than about R325 000 a year could end up paying more tax when the tax credit becomes effective on March 1.
People who earn less than about R235 000 a year should see some kind of tax saving. The change should be largely neutral for people who earn annual amounts between R235 000 and R325 000. Taxpayers over the age of 65 will still be able to deduct from their taxable income all their medical scheme contributions, as well as all their medical expenses. The proposals to change the tax deduction to a tax credit from March next year are contained in the Taxation Laws Amendment Bill, which has been approved by the National Assembly and which will go to the National Council of Provinces next week.
The bill is expected to be promulgated before the end of this year. For the first two months of next year, the tax deductions will remain as they are at a fixed rand amount, and your tax saving will depend on your marginal rate of income tax. For example, if you earn R150 000 a year, and your medical scheme contributions for next year for a family of four will be R2 320 a month, your employer will be entitled to deduct the full amount from your monthly salary before calculating your Pay As You Earn (PAYE) tax for the month. Because a person who earns up to R150 000 a year pays tax at 18 percent on all earnings above the tax threshold (in the 2011/12 tax year, R59 750 a year for taxpayers under the age of 65), the tax saving from the deduction of R2 320 will be equal to about R418 a month. If you are self-employed, you will deduct the relevant amounts when you calculate your provisional tax and when you calculate your tax liability on assessment at the end of the tax year.
As of March 1, the tax tables will be adjusted to take account of inflation, and the current deductions on which the proposed tax credit of 30 percent are based may also be revised to take account of inflation. However, assuming the tax rate for the person who earns R150 000 remains at 18 percent and the proposed tax credit is implemented at a rate of 30 percent of the current deductions, this taxpayer will be entitled to a tax credit of R720 a month for the next 10 months of the year. This will result in a tax saving of R302 a month. (The new tax credit of R720 less the previous tax saving of R418 equals a saving of R302 each month for this taxpayer.) Y
ou won’t be able to calculate exactly how the introduction of the tax credit will affect your pay packet until the tax tables are announced in the Budget in 2012. Currently, the maximum tax deductions for medical scheme contributions for the 2011/12 tax year are R720 a month for an adult member, R720 a month for the first dependant and R440 a month for each dependant thereafter. Your contributions must be equal to at least these amounts to enjoy the deduction – if they are lower, the deduction is equal to the contribution you pay. If your employer pays all or part of your medical scheme contributions on your behalf, the amount paid by your employer is added to your taxable income as a fringe benefit. You are then deemed to have paid the contributions yourself and you are entitled to deduct them, up to the amounts listed above.
Although there could be an adjustment for inflation on March 1, the tax deductions for the current (2011/12) tax year translate into monthly tax credits of R216 for an adult member of a medical scheme (30 percent of R720), R216 for the first dependant (30 percent of R720) and R144 for each dependant thereafter (30 percent of R440). A single person who earns R580 000 a year or more in the 2011/12 tax year pays tax at the highest marginal rate of 40 percent. If that person belongs to a medical scheme and pays contributions of at least R2 320 a month for a family of four, he or she enjoys a deduction of R2 320 a month (R720 plus R720 plus R440 plus R440), which will result in a tax saving of R928. As of March 1 next year, the tax credit will be R720 (R216 plus R216 plus R144 plus R144), and, as a result, the member will pay R208 a month more in tax. Medical scheme contributions paid by an employer on your behalf if you are employed and over the age of 65, will from March 1 be regarded as a taxable fringe benefit, but you can deduct all the contributions paid from your taxable income.
Your contributions, or a part thereof, can be paid by a former employer on your behalf if you are retired and over the age of 65 without your being liable for tax on this benefit, but you will be able to deduct from your taxable income only that portion of the contributions that you have paid. If, as a retired taxpayer, you pay your contributions in full, you can claim the full amount as a tax deduction. If you are a disabled taxpayer under the age of 65 or if you have a disabled dependant, you will be entitled to set off the monthly tax credit against your PAYE each month. But when your tax is assessed, you will be able to claim as a deduction from your taxable income any contributions paid in excess of four times the tax credit, or R864 a month.
HOW TO CLAIM DEDUCTIONS FOR YOUR OTHER MEDICAL EXPENSES
Next year you will still be able to claim the tax deductions you enjoy for medical expenses other than those for the contributions you pay to a medical scheme as covered by the tax credits. The deductions for other expenses will benefit you at your marginal tax rate. Taxpayers under 65 with no disabilities or disabled dependants will be able to claim medical expenses not recouped from a medical scheme and some of the scheme contributions – those not covered by the tax credits – only if these exceed a certain limit. The South African Revenue Service will work out this deduction for you.
However, if you want to do the calculation for the tax year that starts on March 1 next year, first add your unrecouped medical expenses for the tax year to the contributions you paid during the tax year that exceed four times the tax credit for the primary member – that is, contributions that exceed R864 a month each for the member. Second, work out 7.5 percent of your taxable income before any deductions. Only if the amount you worked out in step one is greater than the amount in step two, can you claim as a deduction the amount from step one that exceeds the amount determined in step two.
Taxpayers with disabilities or disabled dependants can skip step two, because they are entitled to claim all their unrecouped expenses. Over 65s just need to add together all their medical scheme contributions and unrecouped expenses and deduct these from their taxable income.