Almost half of Australian homeowners are going into retirement with a mortgage today. Having high debt for a lifetime is becoming as inevitable as taxes – but what if you could win-win?
What if you could consistently pay less tax, and pay off your mortgage faster? What if you didn’t have to be one of the statistics?
The trick is simple
First, learn the secrets to regularly paying less tax, and use the extra money effectively (rather than having it absorbed into your savings account and forgotten). Winning strategies include:
- Parking your bigger tax return in a high interest account, and using it to increase your mortgage repayments while getting returns
- Switching to fortnightly repayments so you’re making an extra payment each year
- Using an offset account against your mortgage to significantly reduce your interest on the loan (this is a top strategy)
Here’s five of the most effective ways to garner a higher tax return, year after year:
- First, use a tax agent to prepare your tax return
There are lots of free ways to file your tax return each year, which can make it seem like hiring someone is a waste of money.
In practice, the opposite is true. Tax agents know their stuff, and they’ll find all the hidden coins in your proverbial couch. More often than not, you’ll net a bigger tax return using a tax agent, than you’ll spend on their fee.
- Claim everything, including the kitchen sink
Plenty of people don’t realise how many things they can legally claim as tax deductions (which is why a tax agent is so valuable). For example, if you’ve purchased an item for work and personal use, you can still claim the work portion.
A percentage of your car and fuel could be claimed, clothes and stationary supplies, as well as any fees, training, licences or insurances required for your job.
Each industry – and each role within that industry – are rife with potential claimable expenses, but the details are so micro-focused that they’re easily missed. For example, flight attendants can claim make-up and moisturisers, since appearance standards are a requirement for their occupation.
Unlike making big charitable donations to bring down your tax bill, these types of claims are truly ‘free returns’ because you would have purchased them regardless of their tax significance.
- Buy high-ticket items earlier in the financial year
A simple trick for bumping up your next tax return is to buy physical items priced over $300 earlier in the financial year. That might include computers, equipment or tools.
Items over $300 are calculated on your tax assessment as ‘depreciating’ items that you claim for its effective life, rather than an upfront deductible. By purchasing the item earlier in the year, you’ll be able to claim a full years’ worth of its depreciating value, bumping your return at tax time.
- Invest in property
If it’s part of your overall financial strategy, property investment is a sure-fire way to increase your tax return. Not only can you claim almost all expenses of the property (from advertising, to agent fees, to repairs), you can claim depreciation on physical items each year, such as a new dishwasher.
You can even claim the interest and any Lenders Mortgage Insurance you pay on your investment loan. That’s a pretty good win-win deal right there.
And of course, the ultimate goal is that you’re building up a passive income source to pay down all your debts, including your mortgage, and bolster your retirement income.
- Sacrifice your salary for tax benefits
You have a little freedom with your income to pick and choose how its delivered to you. Salary sacrificing means you divide your pre-tax salary into payments and benefits. For example, you would receive less salary to your bank account, and send some cash into your superannuation, a car payment or a personal loan payment.
Salary sacrificing is beneficial in a few ways. Firstly, it reduces your taxable income. Say for instance you earn $100,000 per year and buy a car for $25,000. If you salary sacrificed some of your salary directly to your car payment, your taxable income would reduce to $75,000. This example doesn’t take into account Fringe Benefit Tax, which you would have to discuss with your employer and what the company offers.
Next, salary sacrificing helps you make potentially larger payments on loans to pay them down sooner. For example, you could bump up your car payment by $30 a week, and finalise the loan a year or two earlier, saving you hundreds of dollars in interest payments.
You can also send payments to your superannuation, where it will be taxed at a rate far lower than your tax bracket. While this won’t give you extra dollars in your pocket to help you pay off your mortgage right now, it is boosting your superannuation for later – giving you the opportunity to pay off a lump sum down the track.