How Individuals Can Reduce Taxable Income 

Thinking about your tax only once per anum isn’t the wisest plan for your finances. Planning your tax continuously throughout the year is much more effective if you aim to reduce your tax liability.

Tax benefits can be capitalised into financial planning as an overall investment strategy.

So, a little planning throughout the year can reduce taxable income and save money, and if you’re investing your returns, you can even make money, too.

Here are some strategies that individuals can employ to reduce their taxable income.

If you have to spend money on something work-related, that money could be claimable, for example, if something is needed to do your job and you purchased it in your own capacity. This could be something like a laptop, which can then be declared. You can claim the money that you spent buying it as a work-related tax deduction.

Save all your receipts just to be safe, even if you’re unsure if something is claimable or not. Small expenses add up and claiming the forgotten ones can save you more money than you think in the long run.

The Australian Taxation Office (ATO) lists the following as work-related tax deductions:

  • buying clothing, laundry and dry-cleaning expenses,
  • self-education expenses,
  • transport and travel expenses,
  • tools, equipment, electronics, stationery, and
  • working from home expenses. 
  • Ask Your Employer for Salary Sacrificing 

Salary sacrificing, also referred to as salary packaging, is when your employer sacrifices your salary so you can pay certain expenses before the money reaches your account.

Therefore, you have to indicate the expenses to your employer, who then pays them from your salary directly before income tax is charged. 

This means you only have to pay tax on the balance that reflects in your account. Your sacrificed salary will be smaller, and so will your taxable income, so this method allows you to effectively pay less tax in total.

The expenses that your employer can pay for you include:

  • car payments,
  • children’s school fees, and
  • loan repayments. 
  • Prepay Expenses Yourself 

If you prepay your tax-deductible expenses a year in advance, your deductions are brought forward to the current financial year. Doing this reduces taxable income.

There are two prerequisites:

  • The total pre-paid expenses can’t exceed $1,000. 
  • Immediate deductions are claimable as pre-paid expenses, provided the service is less than 12 months and will reach completion in the next income year. 
  • Personal Superannuation Contributions

An easy and largely beneficial way to maximise your savings is to make contributions personally to your super fund. 

This tax planning strategy is especially beneficial for higher-income earners. Claiming these tax deductions result in only being taxed 15% from your super rather than a bigger percentage of income tax being taken from your salary.

Remember, this tax deduction is only allowable when you make a personal contribution yourself, not when your employer pays your super using your pre-tax income.

This strategy can be employed when your income is generated from: 

  • a foreign source,
  • a partnership,
  • a personal business,
  • government pensions or allowances,
  • investments, 
  • salary and wages, or
  • trust distributions. 
  • Private Health Insurance Can Be a Tax Offset

Middle and high-income earners are incentivised to use private healthcare as it lightens the load on the public health system. So, taking out private health insurance means you receive tax rebates.

Taxpayers are generally billed a compulsory Medicare Levy of 2.0%. If you’re single and earning above $90,000 or a family earning $180,000, and you don’t have private healthcare insurance, you are entitled to pay at least 1% Medicare Levy Surcharge on top of the compulsory 2.0% levy.

Therefore, getting private healthcare insurance means you won’t receive the 1% surcharge, resulting in a tax refund.

Tax offsets for private health insurance are available to those who:

  • are Australian citizens,
  • have a Medicare card, and
  • produce an individual taxable income of $140,000 or less, or $280,000 collectively as a family. 
  • Charitable Donations

Tax refunds are awarded if you donate to a deductible gift recipient (DGR) organisation that’s ATO recognised.

You can donate cash or a gift to the organisation, and in both cases, the donation must be more than $2, and the receipt must be retained.

Other tax-deductible donations that the ATO allows include:

  • heritage gifts
  • property purchased up to a year before gifting,
  • property to the value of more than $5,000,
  • shares to the value of $5,000 or less, and
  • trading stock.

Take note that the money spent on each donation isn’t returned as a tax refund. The amount is instead deducted from your total taxable income.

  • Why Having a Tax Agent Is So Beneficial

Managing your taxes alone isn’t easy, and trying to navigate claiming deductions without the guidance of a professional can lead to trouble if you don’t meticulously follow all the rules set out by the ATO.

The ATO investigates any tax claims they find suspicious, so it’s best to try and stay in the ATO’s good books by not making any claims incorrectly by mistake. 

A tax agent can lodge your taxes for you, that way, you can rest easy knowing there aren’t any mistakes. Their industry knowledge and expertise can help you find suitable strategies to reduce your individual taxable income. 

Plus, the services of a tax agent are tax-deductible expenses!

In fact, any money spent while managing your tax affairs can be claimed as a tax deduction, including:

  • any interest detailed by the ATO,
  • litigation costs,
  • preparing and lodging your tax return, 
  • receiving a valuation for a property donation or deductible gift,
  • receiving tax advice, or
  • travel costs incurred with getting tax advice,

Key Takeaways

Effective tax planning can reduce how much income tax you have to pay monthly and increase the tax return you receive at the end of the financial year as a result.

You can minimise your tax using these strategies:

  • claim work-related expenses,
  • sacrifice your salary,
  • prepay expenses yourself, 
  • make personal contributions to your super,
  • take out private health insurance,
  • make charitable donations to DGRs, and
    • use a tax agent.

Contact KNS Accountants today for personalised and effective tax planning strategies tailored by our expert tax agents to suit your circumstances – and help you claim back our service charges!

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