It's time to file tax returns. Do you want to be smart and save your tax expenses? While many people would look into claiming as many allowances as possible, the often neglected tax-deductible items are instrumental to minimise your tax payments. This article will go through all the deductible items to help alleviate your tax burden!
Use home loan interest for tax deductions? Three things to note
While it is burdensome paying mortgages month after month, it is fair to look forward to some discounts in tax expenses. Homeowners can save up to HK$100,000 a year when claiming "deduction for home loan interest". Since the tax year of 2017/18, the number of years of deduction has been extended to 20 years. But attention should be paid to the details below:
1. Not all mortgage payers are eligible
In order to claim "deduction for home loan interest", three conditions must be fulfilled: the applicant must be the homeowner, the apartment is a local residential property and is not rented out, and the loan was issued by a government-recognised institution.
Let's say you purchased a property under construction. Even though you had secured a mortgage from a bank, your property won't be seen as a place of residence until you move in. And you won't enjoy tax deduction before you start occupying the unit. Meanwhile, some may take a mortgage to buy an industrial building unit for "residential use". But since it is considered as a commercial property instead of residential property, it is unfortunately not eligible for tax deduction either. If you are paying a mortgage for a unit owned by your family member, you are not entitled to a home loan interest deduction as you are not the homeowner.
2. The earlier you start claiming tax deductions, the better
As mentioned above, a homeowner can enjoy up to 20 years of home loan tax deduction. It's worth noting when to start enjoying such a deduction. Remember, the amount of interest payment diminishes alongside the principal over time. Your interest expense decreases as your mortgage gradually matures. Hence, the earlier you start claiming home loan interest tax deduction, the bigger portion of deduction you can enjoy.
3. Car parking spaces are eligible only if located in the same property building
A car parking space which you bought for your own use is also tax-deductible. But you have to purchase it at the same time you own your residential dwelling. And the car parking space must locate in the same residential building in order to qualify for a tax deduction.
All self-education fees are tax-deductible?
The government encourages us to continue studying and allows us to enjoy as much as HK$100,000 tax deduction each year. Even examination fees and relevant study materials are eligible for deductions. That said, it doesn't mean you could enjoy a tax deduction as long as you've paid all the tuition fees.
First of all, the related course must be provided by an approved educational institution or trade association. The applicant should be studying the course for gaining qualifications for his or her current employment. The deduction would not be granted to an accountant who studies cooking or boxing.
Even if you study a jewellery design course in a hope to work in the jewellery industry, the course must be provided by an approved institution or business association; otherwise, you still won’t enjoy any deduction.
In addition, if your attendance rate is too low or you fail the examination to complete the study or secure the certification, you’ll be considered unqualified and thus won’t meet the requirement of tax deduction.
There’s more to note if you applied for Continuing Education Fund. The reimbursed amount won’t be eligible for a tax deduction. So after you received the reimbursement, remember to inform the Inland Revenue Department. They will deduct the reimbursed amount from your earlier claim of “deduction for expenses of self-education”; they will then issue an assessment of additional salaries tax and readjust your tax deduction.
Charitable donations: do they include movie premieres and scout raffle campaigns?
It is well known that charitable donations are tax-deductible. The maximum deduction reaches 35% of the assessed taxable income or business profit, as long as the donation is more than HK$100 every time and is donated to organisations or groups approved by the Inland Revenue Department.
However, since many taxpayers abused the system, charitable donations are often examined by the authority. So please keep a good record of the charity receipts, which enlisted every single donation.
Another thing to note: raffle campaigns, premieres, charity gala and church dedications are not qualified for tax deductions. If you are not sure, you may want to check with the related parties before filing a tax return and acquire donation receipts as proof.
MPF contributions: there’s a deduction ceiling
Every employee’s MPF contribution is 5% of his or her income, while the annual contribution is capped at HK$30,000. This entire contribution is tax-deductible. And if you have voluntary MPF contributions, the tax deduction limit is HK$60,000. One thing to note though, this part of tax deduction cannot duplicate with that of the deferred annuity. So if you have claimed HK$60,000 tax deduction with the deferred annuity plans, you cannot claim tax deductions with voluntary MPF contributions.
The latest hot tax deductible items: deferred annuity and voluntary health insurance
In addition to the above deductible items, the deferred annuity plans and voluntary health insurance plans eligible for tax deductions have gained traction in recent years. They are both viable options and the claims are easy to make.
By purchasing an approved Deferred Annuity policy (with no limit on the number of policies purchased), you can enjoy tax deductible limit up to HK$60,000 annually.
In addition, for those who use Voluntary Health Insurance Scheme (VHIS) for a tax deduction, it does not only cover your own policies but also those you purchase for other “dependents”. All are eligible for tax deductions.
Under the VHIS, the maximum tax deduction for each insured person is HK$8,000 and no limitation on the number of "dependents" for a tax deduction. Yet the identity of the “dependents” must be approved by the Inland Revenue Department which includes parents, grandparents and siblings and spouse's parents, grandparents and siblings.
Therefore, many people choose to purchase VHIS for their elderly at home, as the higher the premium, the more deduction you can enjoy!
Smart filing helps you lower tax expenses. Hope you benefit from the above tips and maximise your tax deductions for better financial plans!
The above content is reviewed by Mr Daniel Lau - Head of Investment Proposition of AXA Hong Kong and Macau
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