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Medical Scheme Tax Credits

Applicable to taxpayers under 65 years

The Taxation Laws Amendment Act 2011 brought about the conversion from medical scheme tax deductions to medical scheme tax credits. This conversion process will be completed in the 2015 tax year.

What is the main difference?

A tax deduction will reduce the taxable income on which tax is paid as it is deducted from the taxpayer’s taxable income.

A tax credit is offset against the tax payable, similar to the tax rebate, which will result in a reduction of the tax payable.

Medical deduction system pre-1 March 2012

The regime for medical deductions for taxpayers younger than 65 years was as follows:

1. The taxpayer could claim the medical scheme contributions made by the taxpayer or employer, up to the capped amount. The capped amount was R720 per month for each of the first two beneficiaries and R440 per month for each additional beneficiary on the fund.

2. The taxpayer could also claim all qualifying expenditure insofar it exceeds 7.5% of taxable income before this deduction.

Note where the taxpayer was under 65 with a disabled family member, the taxpayer could claim 1 above and all qualifying medical expenditure in excess of R500 per annum.

For taxpayers over 65, they could claim all medical aid contributions and all qualifying medical expenditure.

Medical tax credit system: 2012, 2013 and 2014 tax years

Taxpayers under the age of 65

1. Medical scheme contributions

They qualify for a tax credit for medical scheme contributions made by them and their employers on their behalf. The monthly tax credit is as follows:

– R242 for the taxpayer and first dependant;

– R162 for each additional dependant

(above amounts are effective from1 March 2013)

Note: that the medical scheme tax credit is non- refundable and cannot exceed the amount of tax payable.

2. Other qualifying medical expenses A deduction for an amount equal to:

– medical scheme contributions paid in excess of four times the medical tax credit, and

– other qualifying medical expenses

insofar it exceeds 7.5% of his/her taxable income before this deduction (excluding severance benefits and retirement fund lump sums).

Taxpayers under 65 years with a dependant with a disability

They will qualify for the following:

1. A tax credit in respect of contributions made relative to the number of dependants;

2. A deduction in respect of medical scheme contributions made if it exceeds four times the medical tax credits that the taxpayer is entitled to; and

3. A deduction in respect of all qualifying medical expenses.

The 7.5% limitation does not apply.

Taxpayers older than 65

They can claim all medical aid contributions made as well as all qualifying medical expenses.

No limitations apply.

Medical tax credit system: 1 March 2015

Taxpayers younger than 65

1. Medical scheme tax credits may be claimed for medical aid contributions made as above;

2. All excess medical scheme contributions and qualifying medical expenses may be claimed as an additional tax credit, which is calculated as follows:

The amount by which the following formula: ((Medical scheme contributions – (medical

scheme tax credit x 4)) + all other qualifying

medical expenses,

exceeds 7.5% of the taxable income divided by a factor of 4

Taxpayers over the age of 65 and those under 65 with a family member with a disability

1. Medical scheme tax credits may be claimed for medical aid contributions made as above;

2. All excess medical scheme contributions and qualifying medical expenses may be claimed as an additional tax credit, which is calculated as follows:

(Medical aid contributions – (medical scheme fees tax credits x 3) plus all other qualifying medical expenses) divided by a factor of 3.

Qualifying medical expenses are:

Actually paid for by the taxpayer which have not been covered by the medical scheme and that appears as ‘claims not covered by scheme’ on the medical tax certificate and the necessary receipts can be produced as proof of payment.

What is the impact on the net salary of medical deduction vs medical tax credit?

Example 1 – Taxpayer is under 65 and earns a monthly income of R16 040 and makes a monthly contribution of R937 to a pension fund and R2 563 to a medical scheme for himself and three dependants:

The tax deduction system will cap the medical scheme deduction at R2 320. The taxpayer’s net income will be R11 116 (February 2012).

The tax credit system will result in a total tax credit of R768 and will result in a net salary of R11 419 (March 2012).

Example 2 – Taxpayer is under 65 and earns R27 083 per month. His pension fund contribution is R3 000 per month and the medical scheme contribution is R4 623 for himself and three dependants:

The tax deduction system will cap the medical scheme deduction at R2 320. The taxpayer’s net income will be R15 393 (February 2012).

The tax credit system will result in a total tax credit of R768 and will result in a net salary of R15 641 (March 2012).

Impact on PAYE deduction

The medical scheme tax credits may be taken into account by the employer when determining the PAYE to deduct from the employee’s monthly salary.

(Source: SARS Guides and 2012 Budget Speech and supporting documents)