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Medical Aid Tax! How SARS' new changes affect YOU!

Posted 8 July 2018 under TaxTim's Blog
Medical Aid Tax! How SARS' new changes affect YOU!

In 2012 SARS began making changes to how medical expenses were treated for tax purposes. The system at that time created a higher benefit for deducted medical expenses if you earned a high income (bad news for low income earners) and the changes since then have sought to make medical deductions more equal across various income levels.

Basic summary of how SARS calculates your tax

Income Earned
Less: Expenses / Deductions
= Taxable Income
x SARS tax rate
= Tax Payable to SARS

Before 2012

Before the 2012 tax year SARS allowed contributions made to medical aids as deductions against Income Earned (see above). Income Earned would be reduced by the allowable portion of your medical contribution and thus reduce your Taxable Income and your Tax Payable to SARS. Because the deduction is allowed before the SARS tax rate is applied, this arrangement unfairly benefited higher income earners! (see below)

Monthly salary R 12,000 R 20,000 R 25,000 R 40,000
Income Earned (monthly x 12) R 144,000 R 240,000 R 300,000 R 480,000
Medical deduction (R720 x 12) R 8,640 R 8,640 R 8,640 R 8,640
Taxable Income R 135,360 R 231,360 R 291,360 R 471,360
Tax rate for this income bracket in 2012 18% 25% 30% 35%
Tax Payable with medical deduction R 12,285 R 34,168 R 50,799 R 110,462
Tax Payable without medical deduction R 13,840 R 36,328 R 53,391 R 113,486
Benefit of deduction due to medical (unfair!) R 1,555 R 2,160 R 2,592 R 3,024

Deductions: R720 deduction for the first two members (including the taxpayer) and then R440 deduction for any further members would be subtracted against Income Earned.
Other medical expenditure: Deducted against Income Earned provided the amount was greater than the SARS specified threshold.
Taxpayers over the age of 65 / with disabilities: Allowed full deductions against Income Earned of all medical expenditure.

From March 2012

Beginning 1 March 2012 SARS introduced the medical tax credit system for medical aid contributions which was aimed at evening the playing field for lower income earning taxpayers. This credit replaced the previous deduction system and allowed for all taxpayers to receive a credit to reduce Tax Payable instead of a deduction against Income Earned (i.e. after the SARS tax rate is applied). In this way all taxpayers received the same benefit regardless of their income level.

Credits: R242 credit for the first two members (including the taxpayer) and then R162 credit for any further members would be subtracted from Tax Payable (not Income Earned).
Other medical expenditure: Still deducted against Income Earned provided the amount was greater than the SARS specified threshold (see article)
Taxpayers over the age of 65 / with disabilities: Allowed full deductions against Income Earned of all medical expenditure.

From March 2014 – the 2015 tax year

From 1 March 2014 taxpayers of all ages will be subject to a new system which allows only tax credits. Therefore there will no longer be allowed any deductions against Income Earned, but only tax credits that reduce Tax Payable. Depending on the age of the taxpayer, a different tax credit will apply. This will simplify the system and make it simpler for taxpayers to understand and calculate their benefit from medical expenses.

UPDATED 2018 Tax Year

Taxpayers under 65:
- Fixed credit per month of R303 (2018 tax year) per dependent for dependents 1 and 2, and R204 (2018 tax year) for dependents 3, 4, 5 etc PLUS

- IF their medical aid contribution is greater than 4x the above credit, THEN
(that difference + Out of pocket medical expenses)
less an amount equal to 7.5% of your Taxable Income
multiplied by 25% is allowed as a further credit to reduce Tax Payable.

Taxpayers over 65 / with disabled dependents:
- Fixed credit per month of R303 (2018 tax year) per dependent for dependents 1 and 2, and R204 (2018 tax year) for dependents 3, 4, 5 etc (same as above) PLUS

- IF their medical aid contribution is greater than 3x the above credit, THEN
(that difference + Out of pocket medical expenses)
multiplied by 33.3% is allowed as a further credit to reduce Tax Payable.

The effect of the new changes is that SARS has put all taxpayers on an even footing regardless of their income level and thus made taxes fairer for all taxpayers.

2017 tax year!

Taxpayers under 65:
R286 per month for the first 2 members
R192 per month for every member thereafter

Taxpayers over 65/disabled dependents:
R286 per month for the first 2 members
R192 per month for every member thereafter

2020 tax year!

Taxpayers under 65:
R319 per month for the first 2 members
R215 per month for every member thereafter

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