Are you wishing to reduce your taxable income? For those who don’t know, taxable income is the calculation of how much tax an individual will pay depending on their income each year.
Financial planning can have a variety of positive impacts on your future and debt payments, so knowledge surrounding your finances is extremely beneficial.
This selection of ways you can reduce your taxes is a great place to begin learning and developing your financial skill set!
Reduce your taxable income with Salary Sacrificing
Salary Sacrifice is an agreement between yourself and your employer to utilise a specific amount of your pre-tax income to invest in benefits your employer provides of similar value to the wage.
A common example of an agreement of the sort is having your wages partially paid directly to your super fund, rather than to you personally.
This can reduce taxable income as taxes on these investments are generally at a much lower rate.
Rather than being taxed at the marginal rate of approximately 47%, you may have the rate on which you are taxed reduced to approximately 15%!
If you wish to calculate the effects of salary sacrificing and its impact on the money you will still receive from your employment, the Australian government’s Money Smart website is a great tool to do just this!
Keep adequate financial/tax records
When it comes to receiving tax back at the end of a financial year, it’s important that you have accurate financial records to support your claims!
It is not uncommon for individuals to miss out on receiving sums of money back in tax due to a lack of evidence to support their claims.
The money lost in this process can be of genuine benefit to your finances, so it is important that you have an organised record system that allows you access to important receipts and documentation when the time comes!
It is a great idea to organise these records into spending categories such as received payments, payment summaries or receipts, etc, to save you the effort of digging through files to find what you need to support your claims.
Although this may require some effort, it will likely be a great relief for you when it comes time to file for tax back!
Reduce your taxable income with Private Health Insurance
Private health insurance is another active method to reduce taxes on your income.
As an incentive for Australians to invest in private health, easing pressures on Medicare systems, the government offers a variety of benefits including two main factors that improve your tax rate; the private health insurance rebate and the Medicare levy surcharge.
The private health rebate is the act of the government covering a percentage of your costs towards private health.
This rebate will decrease as your income increases, but it is still a positive reason to consider private health.
The Medicare levy surcharge is the percentage of your income that, as an individual without private health, will be extracted from your income and paid to the Australian Tax Office.
If you are an individual who earns upwards of $90 000 dollars, or a family who earns upwards of $180 000, you will likely be required to surrender a percentage of your income to the surcharge.
Simple private healthcare plans may cost less than the Medicare levy surcharge, so it may be worth your while to invest.
This however only applies if it is viable in your financial situation and it is important to take your income and medical needs into account when considering a switch.
Declare all Deductions
It is important when attempting to minimise the tax coming out of your income to declare any and all deductions available to you.
A tax deduction is the reduction of tax available to be taken out of your income, generally on the basis of expenses throughout the year.
You will not receive 100% of the money spent on said expenses, but a percentage will be returned to you.
Some common expenses that can be claimed on tax deduction include home office supplies, work-related car expenses, work-related uniform expenses, work-related phone usage, and many more.
Remember to do your research on what you can claim so that you receive the maximum money back on your taxes spent.
If you are unsure if you can claim a specific expense on tax, don’t hesitate to communicate this with a tax agent when you file.
Pre-pay any expenses
Tax planning is a vital, but often forgotten, task when attempting to reduce your taxable income.
The process of prepaying expenses that relate to your income is a great step in adequately planning your taxes.
This involves the off-putting of claiming deductions until the following financial year.
Expenses must be under one thousand dollars or meet the 12-month rule to qualify, however, but it is wise to consider prepaying expenses before filing for taxes.
This process can reduce your taxable income by allowing larger benefits in the following financial year.
Reduce your taxable income by Donating to Charity
Not only is donating to charity a great way to support those in need in your community but can also reduce your taxable income!
All donations to a charity registered by the ACN charity register over two dollars are considered tax deductible.
This will only apply if you receive no benefit from the donation, so raffle tickets or clothes bought from charities will not be tax deductible.
When you make a donation to a charity, they will generally give you a receipt, either physically or via email.
It is important that you keep these receipts as you will likely need them as evidence that you indeed donated to a charity over the course of the financial year.
Delay Income
Delaying your income is another active method of decreasing your taxable income over a financial year.
You can delay the receiving of income until the 30th of June, meaning tax will not apply to these funds in your current financial year.
This benefits individuals by removing the issue of paying a larger amount of tax when a lump sum of back payments is received.
This applies to you if you would be benefitted by delaying the receiving of your income to avoid paying larger taxes.
This process can be of benefit to you, but it is important to take your current financial situation into account to recognise if it works for you!
Reduce your taxable income – Key Takeaways
Paying tax is something that you will always be stuck with but working towards lowering it can really positively impact your finances.
As aforementioned, it is really important to consider your finances and, if you are unsure, consult a financial adviser on what works best for you and your current situation.
Reducing your taxable income may require some effort, but the money you can save will likely be well worth the work.
Building healthy financial habits is a vital step in improving your general monetary position!
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