How the new Medical Credit System works from 01 March 2014 onwards

With effect from 01.03.2014 taxpayers over the age of 65 will experience a significant change in their tax deductions – where previously a ‘tax deduction’ was granted to reduce the basis upon which the tax due was calculated, now they must claim ‘tax credits’ to reduce their tax liability due to SARS.

There are 2 parts of the calculations:

• Part 1 – Medical contributions vs Tax Credits based on number of dependants:

John and Jill (both 68 years old) belong to a medical aid and pay R24 000 for the tax year in contributions. Based on the SARS stipulated credits for principal and first dependant (R257 each) while each dependant thereafter is allocated R172.

The first calculation is as follows: R257 x 2 x 12 months = R6 168

• Part 2 – Excess contributions and other expenses – a Further Credit

John also paid for additional medical expenses (which the medical aid did not cover/reimburse him for) totalling R30 000 in the 2015 tax year.

       SARS now factors into account three times the 1^st credit (R6 168 x 3) = R18 504 to reduce the total medical aid contributions paid of R24 000 leaving an excess of R5 496

       This balance along with the other qualifying expenses (R30 000) are then used to calculate the further credit – only 33.3% of this is allowed to reduce the tax bill due to SARS.

       The calculation is as follows: R5 496 + R30 000 = R35 496 x 33.3% = R11 820.16

If John had a taxable income of R325 000 for the year (after taking into account various applicable exemptions) – the tax thereon for the 2015 year would be R71 647. Less the age rebates of R19 836 would result in John owing SARS an amount of R51 811. This amount is now reduced by the 2 tax credits – R6 168 and R11 820.16 leaving a net amount due to SARS of R33 822.81 before taking into account any taxes already paid to SARS (PAYE or Provisional tax).

The same would apply for taxpayers under the age of 65 who have a dependant with a disability.

For other taxpayers under the age of 65, Part 2 is amended slightly by using a factor of 4 times the credit (vs 3 times) and limiting the allowable percentage to 25% (vs 33.3%).

Example for taxpayers under 65 years:

• Part 1 – Medical contributions vs Tax Credits based on number of dependants:

John and Jill (both 45 years old) belong to a medical aid and pay R24 000 for the tax year in contributions. Based on the SARS stipulated credits for principal and first dependant (R257 each) while each dependant thereafter is allocated R172.

The first calculation is as follows: R257 x 2 x 12 months = R6 168

• Part 2 – Excess contributions and other expenses – a Further Credit

John also paid for additional medical expenses (which the medical aid did not cover/reimburse him for) totalling R30 000 in the 2015 tax year.  SARS now factors into account four times the 1^st credit (R6 168 x 4) = R24 672 to reduce the total medical aid contributions paid of R24 000 leaving no excess

This balance (now nil) along with the other qualifying expenses (R30 000) are then used to calculate the further credit – only 25% of this is allowed to reduce the tax bill due to SARS.  The calculation is as follows: Rnil + R30 000 = R30 000 x 25% = R7 500

If John had a taxable income of R325 000 for the year (after taking into account various applicable exemptions) – the tax thereon for the 2015 year would be R71 647. Less the age rebates of R12 726, would result in John owing SARS an amount of R58 921. This amount is now reduced by the 2 tax credits – R6 168 and R7 500 leaving a net amount due to SARS of R45 253 before taking into account any taxes already paid to SARS (PAYE or Provisional tax)