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A new retiree's confusion on income tax returns

Published:Sunday | January 17, 2010 | 12:00 AM

QUESTION: I am not quite sure if you are able to handle this one, but I find your answers very informative and I trust your judgement. I am a retired civil servant. I took early retirement at age 58 in 2004. I want to apply for income tax returns, and I made an attempt. But, when I applied to the accountant general for my P24, I was advised that the Income Tax Department most times says that people owe them, so I should beware, because if they say that I owe them I will have to pay up. Strange! This leaves me very upset, dejected and disgusted with the system. How could I owe them, when tax was always deducted from my meagre salary for over 35 years? In addition, $279,675.94 was deducted from my gratuity.

At the moment, my monthly income tax deduction is $9,327.65. Please give me some advice. I do have some questions. Who exactly makes and receives income tax returns?

Do you know of any financial institution with tax-free or tax-deferred instruments?

- Rankine

PFA: Anyone who receives income which has not been taxed at source is required by the Income Tax Act to file a tax return by March 15 each year. This includes the self-employed, including partners, and employed persons with other sources of income, such as rent or a business.

estimated assessments

An individual need not file a return if he is employed, has no other source of income, and tax has been deducted by his employer, in which case, his name should appear on the employer's annual returns.

Although filing is not required, the commissioner of the Taxpayer Audit and Assessment Department (TAAD) may require the taxpayer to file.

If an individual who is required to file fails to do so, the commissioner may make an estimated assessment which may include a penalty. The com-missioner may also use available information about the taxpayer on the department's computer system to automatically generate an assessment.

The TAAD commissioner may, alternatively, issue a court summons for the outstanding returns. The court may fine the offender a maximum of $10,000, plus any outstanding tax assessed for each outstanding return, but a taxpayer who has been paying all his taxes should not have anything to fear if he files his tax returns.

As a pensioner, in addition to the $441,168 of your income which is not taxed, you are entitled to a pension exemption of $80,000 per year, if the pension is from a statutory pension scheme or an approved superannuation scheme.

pension exemption

This applies to pensioners 55 years of age and older and may be applied against pension income or income from any other source, such as interest from the bank.

You will become eligible for an additional exemption for age relief of $80,000 at the age of 65. Persons under the age of 55 who are receiving a pension from a statutory pension scheme are eligible for the pension exemption against pension income only.

These new rates became effective on January 1, 2010.

If you are not benefiting from the pension exemption, you should put in your application to the TAAD, 116 East Street, immediately. It is not automatic; neither is the age exemption for which you will qualify soon. Because the exemption is not retroactive, you would not be eligible for a refund for previous years if you are not now enjoying that benefit.

If you need to apply for the pension exemption, you will be required to provide the TAAD with your TRN and proof of all sources of income, your age, and your pension status.

If you are earning interest, at the bank, for example, you may prefer to earn interest without tax being withheld at source. In this case, you may apply for relief for that purpose when you are applying for the pension exemption but would need to supply the name and address of the bank(s) and all account numbers.

This is not an addition to the $80,000 exemption.

tax-free savings

There are many financial institutions that offer tax-free savings instruments on long-term savings accounts.

To qualify for tax-free interest, you are required to keep the funds in the account for five years, limit your savings to $1 million per year, and take out no more than 75 per cent of the interest earned in any one year.

You may file returns for up to seven years with proof of your pension and any other income you may have earned for each year. You will get a tax refund only if the TAAD determines that you are eligible for it.

You should not owe if you have paid all your taxes.

Oran A. Hall is principal author of "The Handbook of Personal Financial Planning". For free money management advice, email: finviser.jm@gmail.com