Proven Tax Tips that Save You Money

How to reduce taxesOne thing that every Australian resident who works must do is file a financial year-end tax return. Naturally, you want to make sure you fill your tax returns out correctly and you want to make sure that you end up paying the least amount of income tax as possible.
There are some important things you should know about completing your tax returns that can help you save a lot of money at the end of the financial year. Below is a look at some of the top proven tax tips that are designed to help save you a lot of money.

Tax Documents
The first step to completing your tax return is to make sure you have all of the necessary documents readily available. You will first need to have all of the documents that prove your overall income. This includes all payment statements from your employers, government benefits, lump sum payments or leave pay, as well as, any statements from investments, dividends, or any managed funds.

You also want to gather any documents that will show the amount of deductions you can subtract from your tax. This may include paperwork showing any expenses for a work vehicle, travel, education, training, uniforms, safety gear, tools, equipment, memberships, union fees, donations, and phone and internet services. In addition, you want to collect documents that can help you offset some of the taxes you owe through tax credits, such as medical costs, PAYG investments paid, and IAS statements.

Once you have all of this information together, it will make it easier for you to complete you tax return and take all of the credits and deductions you deserve. This will help lower your overall tax burden.

Salary Sacrificing – The most effective tax minimisation technique
Salary sacrificing is another way to lower you overall tax burden. This is a mutual agreement between you and your employer to take some of your earnings and put it towards certain benefits, such as a loan for a car, childcare expenses, and contributions to your superannuation fund. These benefits are taken directly from your salary on a pre-tax basis. This means that you will not pay income tax on this amount. This will lower the amount of taxes you owe for the year, while still providing an extra benefit for you. Not all employers participate in salary sacrificing, but if you are interested you should talk to your employer.

Multiple Sources of Income
If you have more than one source of income, it is very possible that you may have paid less in taxes than you actually owe. This happens because each employer uses the sliding tax schedule that is based on what you earn only from that employer and not for your income as a whole. This may cause you to owe a substantial amount of taxes to the Australian Taxation Office by the end of the year.

To avoid this year-end problem, you may want to ask one of your employers to deduct a higher rate of taxes from your pay on a regular basis. You can meet with a tax account, who can help you determine how much extra taxes you should have deducted each pay period to avoid owing taxes at the end of the financial year.

Medical Expenses
If you had a substantial amount of medical expenses during the year, you may be able to deduct a portion of this expense from your taxes. Typically, a taxpayer can deduct 20 per cent of any medical costs that exceed $2,120. However, if you are a high-earner and make over the set threshold in earnings, you may only be able to deduct 10 per cent of your medical costs that are over $2,120. You must have all of your medical bills together, so you can add them up to see how much you can deduct from your taxes.

Home Office
If you work from home, you will also be able to deduct some of the costs of maintaining a home office from your taxes. The best scenario is to set up your home office in a separate room of the home. This allows you to deduct that portion of the home off your taxes. However, if the room you use for your home office, also functions as another room of the home, then you must base it on the number of hours you used the space for work during the year.

If you want to take a certain percentage off your taxes, you make keep track of all your home expenses in a diary. Expenses that can be deducted include utility bills, cell phone costs, internet fees, depreciated value of office furniture, and office equipment and supplies. Your utility bills, phone and internet can be deducted based on the percentage of the home used for an office. The other expenses can be deducted if they are solely used for your home office.

If you choose to use the rate per hour method, you will need to calculate how many hours through the year you used the space as a home office. You will then multiply that amount by the rate per hour set by the government. This rate currently stands at $0.34 per hour.

Car for Work
You may also be able to deduct some of your transport expenses if you use your car for work purposes. There are four basic methods you can use to deduct these travel expenses from your taxes:

  1. You can track the number of kilometres you drive for work throughout that year and then multiply this amount by the government’s set rate per kilometre. You can deduct a maximum of 5,000 kilometres using this method.
  2. If you travelled more than 5,000 kilometres throughout the year, you can chose to deduct a set 12 per cent of the original cost of the vehicle. There is a maximum value that can be used for the original cost of the vehicle.
  3. If you travelled over 5,000 kilometres, you can decide to deduct one-third of the car’s expenses during the year, instead of using the second option. Various expenses can be included, such as fuel, insurance, oil and repair costs. You must keep all of the bills for these expenses so you can add them up at that end of the year.
  4. You can also take an average travel cost. You must accurately keep track of all your travel kilometres over the course of at least a 12-week period. You can then use the average of this amount to determine how many kilometres you travelled during the year.

Rental Property
If you own a rental property, you will need to report the rental payments received as income on your tax return. However, you are able to deduct several things from these rental payments to lower your tax burden. You can deduct the interest amount you paid on your mortgage, repairs, improvements and maintenance fees for the rental property. You can also deduct 2.5 per cent of the initial cost of the rental property, if the property is less than 40-years old.

These are some of the more popular methods of reducing tax although there are numerous other ways to save – what tactics do you use to minimise tax?

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

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