## 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 Income RM Rate Tax (RM) On the first 2,500 0% 0 On the next 2,500 1% 25 On the first 5,000 - 25 On the next 15,000 3% 450 On the first 20,000 - 475 On the next 15,000 7% 1,050 On the first 35,000 - 1,525 On the next 15,000 13% 1,950 On the first 50,000 - 3,475 On the next 20,000 19% 3,800 On the first 70,000 - 7,275 On the next 30,000 24% 7,200 On the first 100,000 - 14,475 On the next 50,000 27% 13,500 On the first 150,000 - 27,975 On the next 100,000 27% 27,000 On the first 250,000 - 54,975 Exceeding 250,000 28% -

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 ?