Wednesday, February 18, 2009

Best Income Range for Income Tax planning

Income tax act mentions that Income Tax Rates For Resident Individuals (personal income tax ) With Effect from Year of Assessment 2002 is as follow

Chargeable IncomeRMRateTax (RM)
On the first2,5000%0
On the next2,5001%25
On the first5,000-25
On the next15,0003%450
On the first20,000-475
On the next15,0007%1,050
On the first35,000-1,525
On the next15,00013%1,950
On the first50,000-3,475
On the next20,00019%3,800
On the first70,000-7,275
On the next30,00024%7,200
On the first100,000-14,475
On the next50,00027%13,500
On the first150,000-27,975
On the next100,00027%27,000
On the first250,000-54,975

So income tax calculation is as simple as determining your chargable income after minusing all the income tax deduction you are eligible for.

After calculating the actual paying tax verse your chargable income, you can find out the actual effective income tax rate you are paying. Below show a list of effective tax rate

income tax effective rate
2500 0 0.00%
5000 25 0.50%
7500 100 1.33%
10000 175 1.75%
12500 250 2.00%
15000 325 2.17%
17500 400 2.29%
20000 475 2.38%
22500 650 2.89%
25000 825 3.30%
27500 1000 3.64%
30000 1175 3.92%
32500 1350 4.15%
35000 1525 4.36%
37500 1850 4.93%
40000 2175 5.44%
42500 2500 5.88%
45000 2825 6.28%
47500 3150 6.63%
50000 3475 6.95%
52500 3950 7.52%
55000 4425 8.05%
57500 4900 8.52%

The obvious fact is that the more your chargable income is, the more tax you pay.

However, there is a small 'gap jump' due to the way the tax rate is implemented, so called step rate.

The blue graph shows the effective tax rate you pay based on your chargable income on X axis.
The bar belows shows the differences between 2 effective tax rate, or so call the increase gap.

Basically it means if your chargable income suddenly go above certain range, your effective paying rate will S U D D E N L Y increase more than usual as shown in the pink bar above.  Namely everytime when it goes beyond the step income, ie. RM 5,000 RM 20,000 RM 35,000 etc.  However this gap increase becomes less significant when it goes beyond RM 35,000.

If you look carefully at the effective income tax rate graph, you may observe it has a curve pattern like below.

This curve confirms that the B E G I N I N G of the curve has a S T E E P E R rate than the E N D of the curve.

So the B E S T income for your income tax planning is when your chargable income is close to but not exceed 
RM 5,000
RM 20,000
RM 35,000 etc.

The W O R S T income is when you go slightly beyond;
RM 5,000
RM 20,000
RM 35,000 etc.

So when you are in the worst category, perhaps you can buy more books or donate some money ?


CheeKong said...

Yeah, very good observation. In fact, we tried to assess our taxable income by Nov-Dec of a year. If just enter a new step, then donation would do. But sometimes find dissapointment oso, cause may need to donate a lot to lower the gap, then end up spending more. Anyway, it's good to assess the tax blanket by end of year. Otherwise would be too late to donate off the "excessive income."

Michael Tsen said...

Thanks CheeKong, very good points indeed. Actually there is a follow up article after this. The key is still everyone must do their own calculation as everyone will have a unique and different case.