Tax mining – making sure you get every dollar
For the last few years, every Federal Budget has brought tax cuts. It’s important to make sure you dig deep to find every dollar of tax saving possible. If the savings are in your bank account you can do something with the money.
Let's look at couple of examples to show how tax mining works.
Janine’s story
Janine works part-time and earns $36,000 a year. She’s read in the paper that she will get a tax cut of $750 this year. This is true but she also benefits from the increased Low Income Tax Offset (LITO). Last year the maximum LITO was $600 but from 1 July 2007 it is $750. Because of her income last year it was reduced to $160 but this year she will get an extra $350.
So in 2007-08, she will pay $1,100 less tax than in 2006-07. What will she do with it? Janine knows prices have gone up but she is managing OK so she decides to transfer $20 a week automatically from her pay into an on line saving account. It is expected to earn 6.25% interest so at the end of the year she will have $1,072. If she uses the savings to make a contribution of $1000 to superannuation the Government will make a co-contribution to super for her of $1,149 (based on her income and assuming that she meets all other eligibility requirements).
She has doubled her money. In round figures, she will receive a tax cut of $1,100 and by smart use of her money earn another $1,100 from the Government. Over time, the extra money in super will make a real difference.
Charlie’s story
Charlie is aged 62 and has retired. He draws $25,000 from an allocated pension and has other income of $15,000 from an investment property. Last year he paid tax of $7,950 (including Medicare levy) and had $32,050 to live off.
With the new Simpler Superannuation rules that started from 1 July 2007, his allocated pension income will not count as income for tax purposes. This means only $15,000 of his income will be taxable. He will qualify for the full Low Income Tax Offset of $750 and will not pay the Medicare levy. Charlie will only pay $600 in tax, a saving of $7,350.
He decides to reduce the income from his allocated pension to the minimum allowed so his disposable income stays the same and his superannuation pension will last longer.
In both cases, digging deep into the new tax rules has enabled Janine and Charlie to make a real difference to their financial situation.