How to reduce your 2020 taxes before the year ends

Spend & save, all at the same time!

This article is written specifically in relation to Malaysia Income Taxes for Year of Assessment (Y.A) 2020.

Taxes. Oh the ‘joys’ of adulting.
But as the old adage goes, only two things are certain in life – Taxes & Death.
So if we have to live with it, we’d better learn to make the best of it.

In Malaysia, we are required to submit our yearly tax returns by April of the following year (Eg. Year of Assessment -Y.A 2020, has to be filed by by Apr 2021).

Tax reliefs/tax deductions/tax rebates are tax incentives provided by the Government that is applied at different stages of our tax returns, that will ultimately reduce the tax that we pay. These are tabled yearly by the Government so it’s usually wise to check for the latest tax updates on a yearly basis.

For more details, you can check out this comprehensive 14 chapter Tax guide by iMoney.

Most of us often view taxes as an afterthought. Spend first, think about the tax effect next year. The disadvantage of that is we end up paying more taxes when we could have been more strategic with our spending choices / financial decisions – just by knowing what tax reliefs are offered for the year.

With some additional tax reliefs given by the Government this year due to COVID, here are 5 ways to reduce your taxes before 2020 ends:

1. Purchase Electronics – Handphone/Notebook/Tablet

As part of Malaysia’s National Economic Recovery Plan (“NERP” or “PENJANA”) to support Work from Home arrangement’s there is a Special Tax Relief of up to RM2,500 for individuals to purchase handphones/ notebooks/ tablets up till 31 Dec 2020.

As is, there is already a Lifestyle tax relief for Purchase of reading materials, electronics, sports equipment or internet subscription of up to RM2,500, so the Special Tax Relief is actually an additional tax relief.

Eg: In 2020, if you purchase a notebook of RM4,000, the entire amount can be used as a tax relief vs in 2021, if you bought the exact same notebook, you can only claim up to RM2,500.

If you have been thinking of purchasing a new gadget, there is no better time than 2020!

TLDR:
Special Tax Relief : Purchase of Electronics – claimable up to RM2,500 (only claimable for Y.A 2020)
Lifestyle Tax Relief : Annual Purchase of reading materials, electronics, sports equipment or internet subscription – Up to RM2,500

2. Contribute to a Private Retirement Scheme

With rising cost of living and slow wage growth, it’s no surprise that EPF savings alone would not be enough to last us through retirement. According to EPF, 80% of EPF contributors do not meet the minimum savings target of around RM240,000 by retirement age. So, to encourage us to invest and save more for retirement, the Government offers annual tax relief for contributions to Private Retirement Schemes (PRS) of up to RM3,000.

There is quite a lot to unpack here, so hear me out.

What is PRS? – PRS is a voluntary contribution scheme (in addition to EPF) to allow individuals to save for retirement
Who runs PRS? – This scheme is administered by Private Pensioner Administrator Malaysia (PPA) – in partnership with many PRS providers (which are also common Unit Trust Providers) such as Public Mutual, Affin Hwang etc, who will manage and invest your contributions, to invest and grow your money (similar to EPF, but PRS providers are private companies)
Is there a minimum contribution amount? – It varies based on the PRS providers, but can be as low as RM100.
When can I withdraw the $$? Similar to EPF, you can only withdraw 70% of funds at the retirement age of 55 years old. The remaining 30% can be withdrawn only for selected reasons after one year of enrolment.

In essence, if you are looking for ways to save/invest your funds, as an alternative to fixed deposits, private unit trusts, you may consider contributing under PRS, at least up to the claimable amount.

TLDR:
Tax Relief: Annual Contributions to Private Retirement Scheme – claimable up to RM3,000
Earnings generated by PRS funds are exempted from tax charges

If you would like to understand more about PRS and how to choose the right fund for you, I suggest checking out Ringgit Plus’s Guide to Investing in PRS and PPA’s own comparison of fund performance and fees.

3. Travel locally – Cuti-cuti Malaysia

With the country borders being closed till further notice, I’m sure the travel bug in us is itching for an adventure. The good news is we can travel locally (and no inter-state border restrictions anymore yay)! Be it a staycation, or a trip to another state, any domestic travel expenses can be claimed as a tax relief!

So, if you are thinking of treating yourself for the next two weeks, now you have an excuse! 🙂
(Of course by adhering to SOPs and practicing social distancing too)

This tax relief is introduced to boost the local tourism sector which is badly affected by COVID, so it would only apply to travel expenses incurred from 1 March 2020 to 31 December 2021.

TLDR:
Tax relief: Domestic Travel Expenses – claimable up to RM1,000 (only claimable for Y.A 2020 and YA2021)

4. Buy a car

What?! How outrageous! hahaha
Disclaimer : This tip only applies for those already considering to get a new car (Please consider your financial situation before making a huge purchase).

As part of the COVID stimulus plan, the Government has waived the sales tax for any purchase of locally assembled cars and lowered the sales tax for imported cars from 10% to 5%, for any purchase between 15 June 2020 -31 December 2020.

As a car buyer, you won’t actually enjoy the full discount but you will definitely enjoy some savings, approx 1-5% from the Price before sales tax exemption.

TLDR:
100% sales tax exemption for the purchase of locally assembled cars
50% sales tax exemption for the purchase of imported cars (ie. 5% sales tax)

5. Donate to the needy

This year has been challenging for almost everyone. During this season of giving, I think it’s worth paying it forward to a charity/cause that you care for.

All donations to Government approved charitable organisation/ approved sports activity or body/ government or local authorities can be deducted up to 7% against your aggregate income. What this means is donations to individuals are not tax deductible.

Eg. Aggregate income is the sum of all taxable income such as your salary, rental income etc. So imagine if your aggregate income is RM100,000 and you donated RM10,000 in 2020, you can therefore get a tax deduction of RM7,000 (7% x RM100k). Your chargeable income will therefore be RM93,000 (RM100k-RM7k).

Be sure to also remember to keep the receipt! In fact, for all the above, you should keep a receipt/records for tax purposes for at least 7 years.

TLDR:
Tax deduction : Donations to approved charity organisations – up to 7% of Aggregate income

That wraps up the 5 tips to reduce your taxes this year!
I’m in no way a Financial expert and it’s best to speak to a licensed tax agent to understand your needs. If you need more info, there are plenty of financial sites with detailed explanations and great advice.

Though, I hope this post helps to kick-start your journey in the world of taxes 🙂