When it comes to tax preparation, many people tend to only think about it when the filing deadline approaches. However, taking a year-round approach to tax management can have significant benefits for your financial wellbeing. By keeping your taxes in mind throughout the year, you can avoid the stress of the tax season and better manage your finances overall. If you’re not sure how to get started, consider implementing these tips to shift from a “tax season” mentality to a “tax year” mindset and enjoy more peaceful nights.
Monthly Date Nights
If you want to avoid tax-related headaches, it’s a good idea to schedule a monthly appointment with yourself to review your tax maintenance. This is especially important if your income tends to fluctuate from month to month.
Make sure to revisit your income each month and update your projections as needed. This way, you can quickly identify any unexpected increases in income and adjust your tax planning accordingly. You should also check how much tax your employer has withheld from your income or how much you’ve withheld if you’re self-employed, to ensure it’s enough to cover your tax liability based on your projected income.
For self-employed individuals, this monthly check-in can also help you stay on top of quarterly tax payments and avoid surprises. It’s a good time to review your monthly budget and look for ways to reduce expenses, which could free up funds to contribute to a retirement plan or holiday savings plan.
Let’s say you’re a freelancer and your income can vary from month to month. In January, you earned $4,000, in February you earned $5,500, and in March you earned $6,000.
By the end of the first quarter of the year, your year-to-date income is $15,500. Based on this, you can calculate that your total income for the year will likely be around $62,000 ($15,500 x 4 quarters).
Now, if you notice that your income starts to increase each month, you can anticipate that you’ll end up earning more than $62,000 by the end of the year. This means you might owe more in taxes than you originally thought.
You can adjust your tax withholding or make estimated tax payments to the Australian Taxation Office (ATO) each quarter. By doing this, you’ll avoid any surprises when tax season rolls around.
Pro Tax Tip: Use the ITP taxation calculator on our website for an estimate for how much tax you’ll be obligated to pay.
Concessional superannuation payments
There are tax savings to be made by paying a little extra in your superannuation fund. Superannuation concessional payments are contributions made to a person’s retirement savings account before tax. These contributions are taxed at a lower rate than the person’s normal income tax rate, which is why they are called “concessional.”
Concessional contributions can be made by an employer, as part of an employee’s salary package, or by an individual making personal contributions. The contribution limit for concessional payments is currently $27,500 per financial year for all individuals, regardless of age.
If you make concessional contributions to your super, it will lower your taxable income, which means you pay less income tax. It’s unlikely you’ll make an end of year deposit, so paying a little extra with each pay period will help you maximise these tax-breaks.
Minimise Capital Gains
If you’ve invested in stock or property, you may be wondering how to minimize capital gains tax on your investments. One way to do this is by holding onto your investments for more than 12 months. This is because the capital gains tax discount applies to assets held for longer than a year.
You can plan to offset your capital gains with capital losses. If you have investments that have decreased in value, you can sell them to realize a capital loss, which can then be used to offset your capital gains.
It’s also important to keep track of your costs associated with acquiring and selling your investments, as these can be used to reduce your capital gains. This includes things like brokerage fees, legal fees, and stamp duty.
Lastly, if you’re a small business owner or investor, you may be eligible for the small business capital gains tax concessions. These concessions can significantly reduce your capital gains tax liability.
Small Business Capital Gains Tax Concessions
Small business capital gains tax concessions are tax benefits provided to eligible small business owners in Australia when they dispose of their business or business assets. These concessions can help to minimize the capital gains tax that would ordinarily be payable upon the sale of a business or business asset.
There are four main concessions available:
The 15-year exemption: This exemption allows small business owners who have owned their business or business asset for 15 years or more to disregard any capital gain made upon the sale of that asset.
The retirement exemption: This exemption allows small business owners who are aged 55 or over and are retiring or are permanently incapacitated to disregard up to $500,000 of the capital gain made upon the sale of their business or business asset.
The 50% active asset reduction: This concession provides a 50% reduction on the capital gain made upon the sale of an active asset. An active asset is an asset that is used or held for use in a small business.
The small business rollover: This concession allows small business owners to defer the capital gain made upon the sale of an active asset if they use the proceeds to acquire another active asset.
Pro Tax Tip: It is important to note that there are specific eligibility requirements for each of these concessions, and seeking professional advice is recommended to determine whether you qualify.
Getting advice from a tax adviser a few times throughout the year can make tax season stress-free. They may be able to find deductions you may have missed, and discovering them during the year instead of at tax time will give you time to gather the necessary documents to maximise your tax benefits. Discussing your tax strategy with an ITP tax expert can help you feel more confident and make the tax season smoother.