How to Avoid Tax-Time Shock
Avoid Tax Shock: Simple Steps to Keep Your Finances in Check
Tax time can be stressful, but avoiding an unexpected tax bill doesn’t have to be difficult. With a few proactive steps, you can keep your finances on track and prevent the dreaded tax shock. Whether you’re an employee, small business owner, or juggling multiple sources of income, here’s how you can avoid tax shock and make tax time hassle-free.
1. Understand the Tax-Free Threshold
Claiming the tax-free threshold can significantly reduce the tax withheld from your wages. However, it’s essential to claim it correctly. The tax-free threshold allows you to earn up to $18,200 before you start paying tax. If you have multiple jobs, only claim the threshold from your highest-paying job. Claiming it from multiple employers could result in an unexpected tax bill at the end of the financial year.
Tip: If unsure, speak to your payroll department or check with the ATO to ensure you’re claiming it correctly.
2. Let Your Employer Know About HECS or HELP Debts
Do you have a study or training loan like HECS or HELP? If so, let your employer know. Repayments for these loans are income-contingent, and you must ensure enough is withheld from your wages to cover them. Otherwise, you might face a hefty tax bill come tax time.
The PAYG (Pay As You Go) withholding system allows your employer to take out extra to cover these repayments. If you don’t adjust your withholding, you may not be paying enough throughout the year.
Expert Tip: It’s important to regularly review your tax situation and adjust your withholding to ensure you don’t fall short at tax time.
3. Consider the Medicare Levy Surcharge
The Medicare Levy Surcharge is another area where taxpayers can get caught off guard. If you don’t have an appropriate level of private patient hospital cover and earn above a certain income threshold, you may be liable for the surcharge. This can be as high as 1.5% of your taxable income.
Importantly, your employer doesn’t automatically withhold this surcharge, so you need to plan for it if you think you may be affected. The surcharge applies to individuals with incomes over $93,000 or families with incomes over $186,000.
Avoid Surprise Costs: If you’re approaching these thresholds, consider taking out private health insurance or setting aside additional funds to cover the surcharge.
4. Check Your Private Health Insurance Rebate
If you receive a private health insurance rebate, make sure your income tier is correct with your health insurer. The rebate is based on your income level, and if your income increases but your rebate amount doesn’t adjust, you could end up owing money when you lodge your tax return.
Proactive Move: Update your income estimate with your insurer annually to avoid this. It will prevent over-receiving the rebate and needing to repay it later.
5. Prepay Tax on Business or Investment Income
If you earn income outside your regular employment, such as from investments or a small business, consider making PAYG instalments throughout the year. Prepaying tax can smooth out cashflow, allowing you to avoid a large bill when you lodge your tax return.
This is particularly helpful if your income fluctuates. By entering into a PAYG instalment arrangement, you can spread your tax payments throughout the year, reducing the risk of tax shock at the end of the financial year.
6. Keep Good Records of Deductions
Claiming deductions is a great way to reduce your taxable income, but you must keep accurate records. This includes receipts for work-related expenses, donations, and other allowable deductions.
Pro Tip: Good record-keeping is the foundation of a stress-free tax return. Keep a folder for receipts and use apps or tools to track your expenses.
7. Plan for the Due Date
If you lodge your tax return yourself, the due date for payment is 21 November. However, if you use a registered tax agent, the deadline may be later, depending on when you lodge. Either way, it’s crucial to know when your payment is due to avoid penalties and interest.
Stay Ahead of Deadlines: If you anticipate owing tax, plan ahead by saving or entering into a PAYG instalment arrangement to spread payments.
8. Be Aware of Changes to Tax Laws
Tax laws can change, and staying informed is key to avoiding surprises. Whether it’s new thresholds, rebates, or tax credits, keep up to date with announcements from the ATO.
Recent Update: The ATO has been increasingly vigilant in reviewing rental property deductions and work-from-home expenses. Ensure you understand the rules to avoid penalties.
9. Manage Multiple Sources of Income
If you work multiple jobs or earn income from different sources, managing your tax obligations can get complicated. You might need to withhold additional tax to cover your total income, not just what you earn from each employer.
The ATO offers a range of online calculators and tools to help estimate how much you should withhold. This ensures you don’t end up owing money at the end of the year.
10. Ask for Help
Navigating tax rules can be tricky, especially if your situation is complex. Don’t hesitate to seek professional advice. A registered tax agent or accountant can help you plan effectively, reduce your tax liability, and ensure compliance.
Expert Advice: Consulting a tax professional not only helps avoid mistakes but can often lead to better outcomes in terms of tax savings.
Final Thoughts: Preventing Tax Shock Is All About Preparation
Avoiding an unexpected tax bill is all about taking proactive steps throughout the year. By understanding your entitlements, planning for changes, and keeping your records up to date, you can eliminate the stress that tax time often brings.
Whether it’s ensuring you’re only claiming the tax-free threshold from one employer, notifying your employer of any HECS/HELP debt, or preparing for the Medicare Levy Surcharge, being organised is key to avoiding a tax shock.
So, when next tax time rolls around, you’ll be ready, confident, and in control of your finances.
Key Takeaways:
- Claim the tax-free threshold correctly.
- Inform your employer about HECS/HELP debts.
- Consider private health insurance to avoid the Medicare Levy Surcharge.
- Keep your private health insurance rebate updated.
- Prepay tax on business or investment income to spread your payments.
- Keep accurate records of deductions to avoid penalties.
- Plan for the 21 November due date if you lodge your return yourself.
Taking these simple steps can help ensure that your tax return goes smoothly and you avoid unnecessary headaches.