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Highlights
- Homeowners can reduce their taxes by acquiring a mortgage offset account.
- Capital gains refer to the money made through the selling of an asset, like shares or a house, where a profit has been made.
- People often miss out on tax deductions they could make because they fail to keep a proper record of their taxes and finances.
No one likes paying taxes and if there’s any way to pay lesser taxes, people often pounce on the chance to do so.
So how can you save money in taxes? Here are five useful tips to retain more money in your pocket, come tax time.
Salary Sacrificing
Also called “salary packaging”, this method can save you a lot of money. It works in a variety of ways. As part of salary sacrificing, employees put some of their pre-tax income toward a benefit (such as motor vehicles, superannuation) before they are taxed.
These benefits are known as “fringe benefits” and can save taxpayers a great deal of money each year. However, there is a limit on what can be salary sacrificed.
Offset your mortgage
Another way homeowners can reduce their taxes is by acquiring a mortgage offset account.
Opening a mortgage offset account allows taxpayers to offset their non-deductible interest on home loan with interest on the standard, taxable earnings of money in a deposit.
Using this strategy, taxpayers can avoid paying interest on the entire amount of their home loan. Instead, they are charged interest on the loan, minus the money in the savings account.
Minimise Capital Gains
Capital gains refer to the money made through the selling of an asset, like shares or a house, where a profit has been made. As such a capital gains tax (CGT) is a tax on the profit from the sale of an asset.
If the asset is held for minimum one year, then taxpayers have to pay a whopping 50% on top of their marginal tax rate.
Capital gains have to be paid in the same financial year in which they are realised, while losses can be carried forward.
So, taxpayers can reduce the amount of CGT by prepaying deductible interest. An investor can prepay expenses on an investment up to twelve months in advance. Therefore, interest on investment loans can be claimed in the financial year in which you are planning to sell the asset. Prepaying deductible interest can help save money on taxes, if the taxpayer has a sizeable tax liability from the sale of an asset.
Additionally, CGT can be avoided on a house, if the person lives in that house. On the other hand, if the house is an investment being rented out, the owner is not able to claim this exemption.
Donate Money
Any donation made to a charity, greater than two dollars, is tax deductible. Make sure to get a receipt of the charity when you make a donation. Then file that receipt away at the time of filing your return.
When tax time rolls around, add up the donations and put them under the “charity donations” section in your tax return. Then the amount you have paid in donations, will be deducted from your total taxable income.
Keep good tax records
People often miss out on tax deductions because they fail to keep tax and financial records in a sound manner.
Moreover, keeping an organised record of taxes can help if you happen to get audited by the Australian Tax Office (ATO). The ATO is much more likely to inquire about tax deductions you’ve claimed in previous returns.
Therefore, keeping organised financial records can save a lot of time and energy if the ATO happens to knock on your door.
Bottom Line
There are many different methods and strategies you can use to save big on taxes.
For more information, go to the ATO website or talk to your personal accountant to see which exemptions might apply in your situation.
