Taxpayers over the age of 65 are likely continue to enjoy the tax deductions they can currently use when the tax deductions for those under the age of 65 are converted into tax credit next year.
The National Treasury told Parliament’s standing committee on finance this week that this will be what it proposes when it tables the Taxation Laws Amendment Bill in Parliament in October.
Cecil Morden, the treasury’s chief director of economic tax analysis, says taxpayers over the age of 65 will continue to be able to deduct their medical scheme contributions from their taxable income in full, as well as all the medical expenses they incur which they do not recoup from their medical scheme.
In the case of taxpayers under the age of 65, the monthly rand amount you enjoy as a tax deduction for medical scheme contributions paid, or as a deduction against the taxable fringe benefit if an employer subsidises your medical scheme contributions, will be scrapped from March next year if the Taxation Laws Amendment Bill, as outlined by the treasury this week, is approved.
If the bill is approved as proposed, taxpayers will get a tax credit, which would be like a tax rebate equal to 30 percent of the rand amounts that are currently allowed as a deduction.
This means that if the proposal is implemented from March next year, people under 65 paying tax at marginal rates higher than 30 percent will pay more tax; those on a tax rate of 30 percent will be unaffected; and those paying tax at rates lower than 30 percent should see their tax reduced.
In the draft Taxation Laws Amendment Bill, which was tabled in June, the treasury had proposed that the tax credits also apply to over-65s from next year. It had also proposed a supplementary credit for over-65s.
However, this week Morden indicated that the treasury had decided to shelve all changes to the medical scheme and medical expense deductions for those over 65, leaving them to continue to enjoy the deductions they do now.
The change in the proposals means taxpayers over the age of 65 who pay tax at a rate of less than 30 percent will not immediately benefit from the reduced tax liability that comes with the tax credit system proposed for taxpayers under the age of 65.
However, the treasury plans to come up with new proposals for converting to a tax credit all the remaining tax deductions for medical scheme contributions and medical expenses. Morden indicated these proposals would probably be announced in next year’s budget for implementation in 2013.
Next year, taxpayers under the age of 65 will continue to be able to deduct their unrecouped medical expenses, as well as contributions that exceed a certain limit, if together these expenses exceed 7.5 percent of taxable income. This is broadly in line with the current system, Morden says.
How the credits will affect under-65s
The proposed medical tax credits for taxpayers under the age of 65 should be welcomed by medical scheme members who earn less than R235 000 a year.
In explaining the proposed tax credit system to Parliament’s standing committee on finance this week, the National Treasury published a table that shows how much tax you save each month as a result of the current tax deduction you can claim for medical scheme contributions (see the “Tax deduction versus tax credit”, link below).
The table illustrates who will benefit and who will pay in more if the tax credit, which is similar to a tax rebate, is equal to 30 percent of the rand amounts currently allowed as a tax deduction for medical scheme contributions.
The monthly 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. You benefit from these deductions at your marginal rate of rate. Therefore, a medical scheme member on a tax rate of 18 percent receives a tax reduction of only 18 percent of these rand amounts, whereas a member on a tax rate of 40 percent receives a tax reduction of 40 percent of these amounts.
For example, a single member of a medical scheme who pays at least R720 a month in contributions and is on a tax rate of 18 percent receives a tax reduction of R130 a month, whereas a single member who pays R720 a month in contributions and is on a tax rate of 40 percent receives a reduction of R288 a month.
The monthly amounts you can claim as a deduction may be increased by inflation for next year.
If the tax credit had been implemented in this, the 2011/12, tax year, it would have amounted to R216 a month (30 percent of R720) each for the member and first dependant and R144 a month each (30 percent of R440) for subsequent dependants.
For example, the single member taxpayer on tax rate of 18 percent would have paid R86 a month less in tax, whereas the single member on a rate of 40 percent would have paid R72 more in tax each month.
Besides the tax credit for medical scheme contributions, you may qualify for a further deduction if your medical scheme contributions exceed four times the tax credit. That is, at the current tax rates, the contributions for a single member must exceed R864 a month and for a family of four they must exceed R2 880 a month.
The amount in excess of, for example, R864 or R2 880 a month must be added to your unrecouped medical expenses.
If the total of your excess contributions and expenses added in this way exceeds 7.5 percent of your taxable income, you can claim the amount above 7.5 percent as a deduction from your taxable income.
Taxpayers with disabilities or those who have a disabled dependant will be able to deduct all their unrecouped medical expenses and their medical scheme contributions that exceed four times the medical tax credit.
These taxpayers will also be able to deduct expenses incurred as a result of their disability as outlined in the list of approved expenses published by the South African Revenue Service.
Morden told Parliament that the tax credit for unrecouped expenses for taxpayers under 65 is likely in future to be converted to a tax credit at a tax rate of 25 percent and not 30 percent.