Taxes don’t have to be burdensome – a tax refund could be on the horizon

Sharon Hamman, Senior Legal Advisor at Momentum, explains how to get the most out of your tax refund by getting the right advice and making informed decisions.

At the moment, the cost of living crisis is forcing South Africans to use every engine to generate as much income as possible. One of these engines starts only once a year and sees South Africans filing their tax returns to see how much – if anything – the government owes them (for a change) in the form of a tax refund.

You will receive a tax refund if the tax you paid during the tax year is higher than the tax you actually owe. This only happens if you incurred deductible expenses during the year that were not taken into account in your monthly tax calculation by your employer. By filing a tax return, you provide the necessary proof of the expenses incurred and can then benefit from the tax advantages as a result.

Tax season is just beginning, and for many, it’s a season of receiving rather than giving—if you do it right. To have a shot at a tax refund, you have to go beyond the “automatic assessment,” where the devil is usually in the details. That’s why many people don’t even bother, sometimes at their peril.

What you need is a dream team: a financial advisor who can give you sound financial advice and who understands taxes in a tough economic time, and a tax advisor who can take the devil out of the details when filing your tax return.

  1. Playing the long term with pension savings

Why not enlist the help of your tax advisor to help you achieve your retirement planning goals? Once your financial advisor has determined what you need to save to provide for your retirement, you can save what you can afford in a tax-efficient way.

When you invest in a savings instrument for your retirement, such as a pension/provided fund or annuity fund, you benefit from tax advantages, because the contributions are tax deductible within certain limits.

The logic is this: because you are saving to retire comfortably and not become a burden to the state as a pensioner, the government will pay you back part of your pension contributions. If the contributions are facilitated by your employer, you can even enjoy the tax benefit during the year, which increases your net income.

Your financial advisor can determine the maximum tax deduction you qualify for, depending on your salary and taxable income.

For example, if you qualify for a tax-deductible contribution of R30,000 per year (R2,500 per month) and your tax rate is 31%, your tax refund will be R8,100.

2. The tax authorities can make your contributions to the health insurance scheme more affordable

The South African Revenue Service (SARS) has introduced a tax credit for contributions to a medical scheme. A portion of your contributions will be deducted from your total tax bill (the total amount of tax you have to pay).

This benefit, known as the Medical Schemes Tax Credit, is payable to you if you contribute to a medical scheme. The size of the benefit depends on the number of people added to your medical scheme as dependents. The benefit is available to the main member of the scheme and is based on a fixed monthly amount per dependent. SARS reviews this amount annually.

If you have an employer-based medical scheme where your employer facilitates the payment of the contribution, the tax credits are usually taken into account during the tax year when your monthly tax is calculated. In this case, you will not receive a refund at the end of the tax year, because you received the benefit during the tax year.

If you provide your own health insurance (it is not an employment-related benefit), you will benefit from the tax deduction when you are assessed.

If you are unsure whether you should file a tax return for this reason, consult a tax advisor.

3. Medical costs that you have to pay yourself do not necessarily mean that you have to pay anything yourself

If you do not have a medical plan and pay all your medical expenses yourself, or if you do have a medical plan but not all of your medical expenses incurred in the tax year are covered by your medical plan or your GAP cover, you may be eligible for a tax deduction.

SARS provides qualifying medical expenses for which you can claim a tax deduction, if you paid them out of pocket. A specific formula is used to determine the amount of tax refund you are entitled to, and this depends on your taxable income. It is important to remember that you may not be eligible for a refund, but it may be worth speaking to a tax advisor to be sure.

Your financial adviser can also advise you on more cost-effective ways to cover large, unexpected medical expenses in the form of a medical scheme if you don’t have one, or GAP cover.

4. Working from your home office

Even if you have a permanent job, if you worked from home in the past tax year, you can deduct home office expenses. According to SARS, if you are a home-based employee who has a room set aside to be used for “trading,” you can deduct certain expenses incurred in maintaining that home office.

However, this comes with a few conditions and that is why it is important to read the “fine print”. For example, your office must be in a special room or space in your home and set up for business purposes, and you must have performed more than 50% of your duties from this home office. Simply working at your dining table or in your master bedroom at the dressing table is not enough.

If more than 50% of your compensation consists of commission or variable payments based on work performance, other requirements apply to qualify for this refund.

Consult a tax advisor to assess your personal circumstances and determine whether you qualify for this deduction. Be aware that claiming a home office could come back to haunt you later in the form of capital gains tax (CGT) if you decide to sell your home.

Make the refund count

You got your money back, now what? There is no right or wrong answer to this question, but making smart financial decisions throughout your life will benefit you in the long run.

Talk to your financial advisor to consider your options. There are many possibilities, such as adding the money to your retirement savings to give it a much-needed boost or paying off debt, perhaps sending your child on that all-important school trip or even deciding to take that much-needed vacation.

The process of making the decision is almost more important than the decision itself. You just have to make sure that you are making an informed decision, after all the facts have been considered.

So, remember this tax season, you don’t have to go it alone. Reach out to your dream team, get your paperwork in order, and make the most of your (refund) options. Your future self will thank you!