It’s April now, and that means the dreaded income tax filing is coming! I was really hoping that there will be some form of tax rebate, so I was furiously googling since March. Alas, there was no rebate for individual income tax this year.
I’ve only recently learned that I can actually pay income tax in installments over 12 months. I didn’t know about that when I paid for my tax last year. I paid lump sum because I didn’t know the alternative despite having been in the workforce for more than 10 years *facepalm*
So, this year, I need to decide whether I’ll still continue paying lump sum or I’ll switch to installments.
This post is my thought process in deciding which tax payment method I’ll choose.
Pros of Paying Lump Sum
Not having to think about it for the next 12 months. By paying lump sum, I can treat it as a one-time expense in my budgeting. It is akin to giving a yearly hongbao to the government. Pay it then forget about it and enjoy my life. I love a good carefree life.
Earn miles by paying lump sum. One of my life goals is to fly business class by using miles. So, if I can accelerate the points accumulation, why not, right? FYI I used CardUp to pay for my tax in the past; it is a company that pays tax on your behalf using your credit card and charges you an admin fee.
Cons of Paying Lump Sum
It’s giving me heartache. Parting with a huge amount of money is really painful. In the past few years, my tax amount has been growing bigger each year that I had to dip into my saving to pay for income tax.
Pros of Paying in Installments
Better cashflow. I don’t have to dig into my saving anymore, I can treat it like a fix amount expenses each month. My saving will be intact and I can use my saving to invest.
It is interest-free anyway. Who wouldn’t want a free lunch, right? By opting for interest-free installment, you’re basically borrowing money for free.
Cons of Paying in Installments
Not able to earn miles. If you’re a miles chaser, then paying tax in installments may sound like wasting a huge opportunity to collect miles the affordable ways. Because when you pay in installment, you can’t use credit card, you have to use GIRO (means IRAS will deduct the money from your bank account each month).
A fixed monthly expense for the next 12 months. That means, tax payment will always in your mind for the next 12 months. It means your spending power will be slightly reduced because you need to pay for this expense.
So, my decision is…..
I thought I’ll have to spend days thinking about this. Well, I didn’t. It took me less than a day to make my decision.
I decided to pay my income tax in installment!
After paying taxes in lump sum for 10 years, I finally changed to paying in installment and I couldn’t be more excited! Even though I will have less spending power, that’s okay because my saving and investment are intact, which means that my passive income from investment will be intact too. To me, that’s a win.
I now have a separate bank account just to save for tax
To make sure that I have enough to pay for tax each month, I decided to open a separate bank account just for tax. Every month, I’ll transfer a certain percentage of my salary to this bank account, and IRAS will deduct the monthly installment from there.
For example, if my monthly tax installment is 100, I will save 150 each month in this bank account. Why the buffer? Because job security is uncertain, but tax is certain. So, if I do get laid off in the future, I’ll have more than enough to pay for my monthly tax installment. (Me hoping not to get laid off next month)
Should you pay income tax in lump sum or installment?
My answer would be… it’s up to you!
If you can pay your tax in lump sum without dipping into saving, then you can choose lump sum.
If you think you can use the money to generate positive return from investment, then go for installments.
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