HOW TO MINIMIZE YOUR TAX BURDEN LEGALLY
The above statement aptly captures the position most Kenyans find themselves in amid an economic recession. In the ever changing complex financial world we live in today, there is one sad fact which unfortunately never changes – having to pay taxes.
However the tax burden can be reduced through tax shelters. These are legal methods of minimizing or decreasing an investor’s taxable income and, therefore, his or her tax liability.
Tax shelters can range from home ownership, pension plans, individual retirement accounts, investments or investment accounts that provide favorable tax treatment, to activities or transactions that lower taxable income.
Tax minimization (also referred to as tax avoidance) is a perfectly legal way to minimize taxable income and lower taxes payable. Do not confuse this with tax evasion, the illegal avoidance of taxes through misrepresentation or similar means.
At a glance, individual tax payers are entitled to some tax incentives which can either reduce taxable income or tax paid. Apart from the statutory personal relief, individuals can reduce their tax burden by putting their portion of their income in home ownership savings plans, mortgage, life insurance and pension schemes. There is relief to tax payers on premiums paid for life insurance cover.
The amount of insurance relief is 15 per cent of the amount of premiums paid but shall not exceed Sh 60,000 a year. This implies that those paying life insurance premiums below Sh60,000 a year do not pay any tax. There is also relief or deductions of interest paid on mortgage for an owner of occupied house.
The Income Tax Act also states that there is a relief on funds deposited under a registered home ownership plan, subject to a maximum of Sh480,000 a year. There is a tax exemption on interest accruing on housing bonds up to a maximum of Sh300,000.
There is also tax exemption on contributions to registered pension and provident funds as stipulated in Section 8 of the Act.
It is advised that if one is not sure what tax breaks are eligible, help from a consultant can help determine what can and cannot be deducted.
While filing income tax return forms, most people compute their tax liability by charging 30 per cent on their monthly income, without going through the entire income tax scales. Those who do this end up with unnecessary tax burden because they do not benefit from any relief.
Businesses can also reduce their tax burden by taking advantage of incentives offered such as capital deductions given to investors on capital expenditure on industrial buildings and purchase of machinery used for the production of income. Capital deductions are given in respect of wear and tear allowance on tractors, combine harvesters and other earth moving equipment among others. There are also industrial building allowances in respect of capital expenditure incurred on a farm; investment allowance in respect of the hotel sector on buildings as well as tax holidays for firms within the export-processing zone.
The first step you need to take is consult with two or more financial planners. There are instances where you would use a financial consultant who charges for their services and should definitely be considered if needed. However there are plenty of credible financial planning agents with whom you can obtain solid financial information for free to get started. These people work in banks, insurance agencies, and many financial Institutions.
Income is the number one thing taxed in your life so you want to try to reduce this not by making less, but by taking advantage of things like tax credits and tax deductions. Child’s education, mortgage interest, tax-deferred and tax-free investments are definitely something to investigate.
You should also look into healthcare related deductions. If you run a small business many of your expenses can be written off. It’s quite advantageous to be aware of as many deductions as possible to lower your income.
Tips and Warnings
• Gather all the information you can about taxes and related issue so you can save.
• Consult trusted sources with a good reputation and track record.
• Make sure all financial actions taken are legal even if you have to hire a consultant or tax preparer
(Picture courtesy of Wakaguyu wa Kiburi)