How can I reduce my taxable income?
You’re guaranteed two things in life – death, and taxes. While taking care of your physical and mental health can lead to a longer, healthier life, financial planning, and strategising can reduce your tax liabilities. Everyone wants to pay less come tax time. For those who’re looking into debt consolidation and credit repair, learning how to reduce your taxable income can keep more money in your pocket and help you pay off your debts faster.
Paying tax is inevitable. But there are ways to minimise what you pay and help improve your financial health.
If you’re looking for smart ways to reduce taxable income, there’s more to consider than tax concessions and cuts. Good tax plans should be part of an overall investment strategy. To get the most from yours, here’s how to minimise your taxable income.
How Tax Deductions Work
Tax deductions allow you to subtract expenses in certain categories from your income, lowering the amount of money on which you calculate your tax payment. A variety of expenses qualify for itemised deductions, including non-reimbursed business expenses, student loan interest, retirement contributions, and medical costs that exceed a certain threshold. For instance, if you or a family member wound up with a very large medical bill, the ATO may let you deduct that from your taxable income.
To claim most deductions, you must itemise them on your tax return. However, doing so may not make sense if your itemised deductions don’t exceed the standard deduction.
What Is the Standard Deduction?
The standard deduction is an optional tax deduction that allows you to simplify your tax filing. Instead of itemising, or listing out, individual tax deductions, you simply reduce your gross income by the amount of the standard deduction you qualify for.
The 2017 tax overhaul passed by Congress nearly doubled the standard deduction, causing far fewer people to file itemised returns. In 2020, the standard deduction is $12,400 for single filers who can’t be claimed as dependents on someone else’s tax return and $24,800 for married joint filers. In 2020, taxpayers 65 and older or those who are legally blind receive an additional deduction of $1,300 or $1,650, respectively.
It’s important to understand that if you claim the standard deduction, you can’t claim any other itemised deductions. Taking the standard deduction does not affect your ability to claim tax credits, however.
Taxpayers typically opt for the standard deduction when it is greater than the sum of the itemised deductions they could claim.
Other Common Tax Deductions
Home mortgage interest. You can deduct interest you pay on your home mortgage. The deduction is limited to interest on the first $750,000 of the mortgage if you’re married and filing jointly.
Student loan interest. You can deduct interest you paid on student loans taken out for yourself, your spouse or your dependent, up to a maximum of $2,500. This deduction also phases out for filers with higher incomes.
Charitable contributions. You can deduct the value of qualified contributions you make to charities.
State and local taxes. You can deduct any taxes you pay to your state or local municipality, up to $10,000 per year.
While both tax credits and tax deductions can reduce your tax burden, they do so in different ways. Credits directly affect the amount of tax you must pay, while deductions are subtracted from income before you figure the amount of tax you owe. You can also use credits and deductions together. With enough credits and deductions, you could even wind up owing nothing in federal taxes. You should be sure to speak with your Tax Advisor or Tax Preparer before taking any tax credits or tax deductions.
Take Advantage of Salary Sacrificing
Salary sacrificing for employees offers a way to reduce the amount of tax you must pay.
To benefit, you forgo part of your pre-tax pay before you receive it. This can be used to pay for your super, a new car, insurance, computer, mortgage or rent payments and more.
These benefits, known as fringe benefits, can save you thousands a year in tax. There are limits on what can be salary sacrificed or salary packaged. However, potential Fringe Benefits Tax (FBT) can impact on the type of items your workplace is prepared to offer.
One of the most popular options is to salary package a car in the form of a novated lease. These three-way agreements between your employee, financer and yourself can give you access to a new vehicle, as well as reduce your taxable income.
To increase your end-of-financial year payment, consider salary packaging your super as well.
Keep Tabs on Your Taxes
It isn’t hard to keep good tax records.
You just need to be prepared and document everything. To make tax deduction claims, keep all receipts using the Etax mobile app.
If you put aside 10 minutes a week to load receipts into the app, record-keeping for each tax year can be easy.
Manage Your Debt
Even the smallest debts can become big problems if they’re not managed efficiently.
Consolidate any debts into one manageable payment so you can keep track. If there’s debt on mortgages, investment properties or credit cards, the interest expenses may be used to reduce your income tax paid.
If followed, the debt repayment hierarchy will reduce these costs the most. However, always pay off the non-tax-deductible debt first with the highest rate and move down from there.
Claim all Deductions
It’s important to know what deductions you can claim. Once you know, claim all legitimate work-related deductions to minimise your taxable income.
Some of these expenses may include:
- Computer equipment
- Technical or industry-specific books and training
- Vehicle and travel expenses, including meals and accommodation. However, there are strict rules as to what cannot be claimed
- Home office expenses
Purchases used for personal and work can still be claimed if you only include the work-related part as a tax deduction. If you are a property investor or business owner, there are additional ways to reduce your tax here.
The tax department flags unusually high work-related claims throughout all industries, so know the threshold or seek advice if you’re unsure.
To reap the financial rewards, you must be able to provide proof for any claims of more than $300. If the amount is less than $300, you’ll need to show how you worked out the claim if asked by the tax department, but won’t need to provide written evidence.
Paying for some expenses in advance can bring your deductions forward to this financial year, reducing your taxable income and giving you a better bonus.
To take advantage, prepaid expenses must be less than $1,000 or meet the 12-month rule. This rule allows you to claim an immediate deduction as a prepaid expense, providing the service doesn’t exceed 12 months and finishes in the next income year.
Donate to Charity
If you’re feeling charitable, donations are a smart way to keep your taxable income low.
Every donation you make over $2 is tax-deductible. However, it must be to a registered charity to claim.
Donations don’t always need to be in the form of cash either. Charitable gifts, such as clothing, property or household goods, may also be deducted and can help offset capital gains through portfolio balancing.
Remember: Donations will not be distributed back onto your tax refund. Instead, the claimed amount is subtracted from your taxable income, giving you a percentage back.
Max Out Your Retirement Account
One of the most common tax-minimisation strategies some high-income earners use is contributing the maximum amount to their retirement accounts.
The good news is, this tactic is accessible to all income levels. You can max out your retirement fund or contribute a portion of your salary/bonus and claim as a tax deduction.
Use Medicare Levy Surcharge and Private Health Insurance to Maximise Your Refund
If you haven’t taken out private health insurance, it may be worth investigating.
Those without private health insurance pay a higher Medicare levy surcharge. Most taxpayers pay a mandatory 2% Medicare levy. However, if you don’t have private health insurance and earn more than $90,000 (singles) or $180,000 (families), you’ll also pay a minimum 1% surcharge on top.
No one wants to pay more tax than they need to. If you’re looking for strategies to save money, contact our team today to find out more about salary packaging and novated lease options.
Keep Good Tax Records (with the right method, it’s very easy)
You need receipts for tax deduction claims, so you can show them to the ATO if they ask about your deductions. These days, the ATO is asking a lot of questions about tax deductions.
Thousands of people miss deductions they could have claimed, every year. That’s millions and millions of dollars that the ATO keeps, where people could have got it back in their tax refunds.
Do you keep track of every deduction?
Simply keep track of those receipts – it’s the best way for you to remember everything that you can claim. And that means more money in your tax refund.
Use Salary Sacrificing
For those trying to learn how to save tax in Australia, salary sacrificing is one way to do it. This is also called “salary packaging,” and it works a few different ways. With salary sacrificing, a taxpayer would put some of their pre-tax income toward a benefit before they are taxed. Some of the most common salary sacrifice benefits are motor vehicles and superannuation.
So, an employee would forgo part of their pre-tax paycheck before they get it. For example, they could use salary sacrificing to pay for a new car, computer, insurance, rent payments, mortgage payments, and other benefits. These benefits are also referred to as “fringe benefits,” and they can save Australians thousands of dollars in taxes every year, with a few exceptions.
For one thing, there is a limit on what can be salary sacrificed, also called salary packaged. Also, Fringe Benefits Tax, or FBT, can impact the types of benefits your employer offers. For example, employers will offer to salary package a car as a novated lease. This is an agreement between your employer, you, and a financer, and is one way to get access to a new car while reducing your taxable income. If you want to increase your refund this year, you could also consider salary packaging your superannuation too.
Keep Accurate Tax and Financial Records
The ATO is far more likely to ask a lot of questions about your tax deductions than they were a few years ago. If they ask about your deductions, you’ll need to show them receipts for tax deduction claims. Unfortunately, not having a sound filing system can cause a lot of headaches for your tax time. So many Australians miss deductions they can legally claim because of a lack of sound record keeping. If you make this mistake, the ATO will keep your hard-earned money that should have stayed in your pocket.
Many people wonder if they have to keep track of every single deduction. But the best thing to do when it comes to claiming deductions and satisfying the ATO is to keep track of the deduction receipts. This will make it easier for you to remember what you can claim. Record-keeping doesn’t have to be complicated.
Dedicate ten minutes of your time each week to download statements and update your logbooks. Make sure you keep all your receipts in a conveniently accessed, organised, and easy-to-use file folder or filing cabinet. Keeping accurate tax records will save you a lot of time searching for everything at the end of the fiscal year, and best of all, you’ll be able to claim your deductions and ultimately pay less in taxes.
Claim ALL Deductions
If you spend any money on anything related to earning income, you’ll want to claim it. Be sure you declare all deductions possible to pay less tax in Australia. Even things that may seem small and insignificant can add up to huge savings at the end of the financial year. For example, if you purchased something that is used for work, but you also sometimes use it during your time off the clock, you can still claim the money you spent on it as a work-related tax deduction.
If you’re unsure whether or not you can claim a specific item as a work-related tax deduction, keep the receipt of purchase and ask your tax agent when you file. It’s always better to hang on to receipts and not be able to claim the item than to toss the receipt and miss out on tax savings.
Feeling Charitable? How to Pay Less Tax with Donations
Every donation you make to a registered charity greater than two dollars is considered tax-deductible. After donating, the organisation should send you a receipt. Make sure to file that away for tax season. Once tax time rolls around, add up your charitable receipts and enter that into the “charity donations” section in your tax return. But remember that donations do not come back via a tax refund. Instead, the amount of the monetary gift is reduced from your total taxable income, meaning you’ll get back a percentage of the donation.
Minimise your Taxes with a Mortgage Offset Account
If you have a home loan, a mortgage offset account lets you offset your non-deductible interest on the home loan with interest on the standard, taxable earnings of money in a deposit. With this arrangement, taxpayers can create a savings account with their lender. But instead of paying interest on the entire amount of the home loan, taxpayers are charged interest on the loan, minus the money in the savings account.
Add to Your Super (or Your Spouse’s) to Save Tax in Australia
Concessional super contributions are taxed at a rate of 15 per cent once they enter a super fund. This is different than if they were taxed at a marginal rate, which is sometimes as high as 49 per cent. What are the different types of concessional contributions you can make? You can make the following concessional contributions to lower your taxes:
Get Private Health Insurance
You should only do this if it makes sense. If you don’t carry private hospital insurance, but you’re single and make more than 90,000 dollars a year, or you’re a family and make more than 180,000 dollars per year, you will pay a minimum one per cent Medicare Levy Surcharge. The Medicare Levy Surcharge is also collected on top of a mandatory two per cent Medicare Levy that most taxpayers have to pay anyway.
Basic, private healthcare plans can cost less than the one per cent of Levy Surcharge on your gross income, which would be less than the Medicare Levy you’d pay without insurance. For some people, private healthcare might be worth it to lower your taxes. Depending on your needs and medical history, it might also be worth it for the often shorter wait times you’ll get with private healthcare.
Minimise Capital Gains and Minimise Taxes
Any significant assets sold in a given financial year, such as shares, or property, are subject to a capital gains tax. If the investment has been held for at least one year, you’ll be charged a 50 per cent capital gains tax on top of your marginal tax rate. Capital gains taxes have to be paid in the year they are realised. However, losses can be carried forward, but not back. Taxes payable within the financial year can also be decreased if you prepay deductible interest.
On investments, you can prepay expenses up to twelve months in advance. So, interest on investment loans and management fees can be claimed this financial year. If you have a substantial tax liability this fiscal year from the sale of an asset, prepaying can help you save money on taxes.
When it comes to taxes and property, another tax exemption from Capital Gains Tax is if your property is your principal place of residence or PPOR. You can claim the principal residence exemption from Capital Gains Tax for your house. To get it, you’ll need to have lived in the house, or the property must have a dwelling on it that you live in. Learn more about how to reduce Capital Gains Tax for property used for business and investment purposes.
If you pay for some income-related expenses in advance, it can reduce your taxable income by moving your deductions forward to the next financial year. This will give you a higher tax refund. All prepaid expenses need to be less than a thousand dollars or meet the 12-month rule for prepaid expenses. The 12-month rule lets you claim a deduction as a prepaid expense as long as the service doesn’t exceed twelve months and stops in the next financial year.
A professional tax agent can save you a lot of time when it comes to lodging your taxes. They also have inside knowledge and industry expertise on taxes and refunds. By hiring a tax agent to help you with your taxes, you’ll get the largest tax refund possible without running afoul of the ATO.
If you’re learning more about credit repair and trying to reduce debt, lowering your taxable income and getting a refund to come tax time can keep more money in your account. Instead of giving that money to the taxman because you didn’t know what deductions you could take, you can use that refund to pay off debts and rebuild your credit faster.