10 costly tax mistakes - Eureka Report article
10 costly tax mistakes
PORTFOLIO POINT: The clock is ticking to the end of the financial year. Here are 10 of the most common mistakes and how to avoid them.
In the end-of-financial-year rush to get their tax affairs in order many investors unwittingly make crucial mistakes that can add up to thousands of dollars.
3: Attempting a “wash sale”
Many investors will have portfolios that show capital losses. One strategy that investors have used in the past is to sell shares in the last day of the financial year only to repurchase shares the next day. This allows investors to crystallise the losses and offset them against any capital gains while retaining ownership of the shares.
The tax office has warned it will take a dim view of those who participate in such a strategy. If you are seeking to minimise your tax position by selling underperforming shares in the leadup to June 30, by all means do so but if you plan to buy them back again know that the definition of what constitutes a “wash sale” is fluid. You have been warned.
4: Deductions that don’t match your personal situation
The accepted logic when it comes to deductions is to bring forward as many as you can. For example, if you have a work-related expense that you will incur over the next month, it is often better to make the payment now so that you will receive the benefit in this year’s tax return.
The exception to this is if you expect to earn substantially more next year. If, for example, you have earned very little income this year it is likely to be to your advantage to delay any tax-deductible payments until next financial year, when you are earning income at a higher tax rate and therefore the financial benefit of the tax deduction will be greater. In other words, the decision to bring forward a deduction was a mistake.
You could also make a mistake if you defer expenses when you anticipate earning less next financial year through a redundancy or through maternity leave. In this case it is a better idea to bring the payments forward.
5: Putting too much in super
Current super rules allow investors aged up to 50 to contribute up to $25,000 a year while the over 50s can contribute up to $50,000 a year while making the most of the concessional contributions tax of 15%. Sums of money over these limits will be subject to your top marginal rate, which could be as much as 46.5%.
But even non-concessional contributions are capped at $150,000 and sums of money directed into your super above and beyond this limit can be levied at a whopping 93%. Be mindful of just how much you have directed into super during 2009-10 and if you aren’t sure, then check!
Remember that from July 1, 2012, over-50s will only be able to make contributions of $50,000 a year if their balances are less than $500,000 so make the most of it while you can.
6: Putting too little in super
If you or your spouse is earning less than $60,000 a year then it is also worth considering whether you can make an additional after tax deduction to superannuation and collect a government co-contribution.
The best way to go about this is to work out the best estimate of your annual income, and contact your superannuation fund about how you can make the contribution, and how much you should make. If the relevant party earned less than $31,920 in 2009-10 and you make contribute an additional $1000 you can collect an additional $1000 courtesy of Canberra.
The tax office has made more information about the government co-contribution available here, but keep in mind that contributions have to be received by funds prior to June 30; don’t leave it too late!
7: Squandering tax cuts
Almost all income earners will receive a tax cut ranging from $300 to $1300 over the next financial year. Instead of breaking out the Grange, why don’t you bolster your financial position and earmark those extra dollars for extra mortgage payments or additional super contributions?
While a few dollars a week is unlikely to make an immediate difference to your lifestyle, over time it will have a much bigger impact. It also helps build a financial habit that will lead to greater financial success over time: capturing surplus income to build wealth rather than letting it slip through your fingers.
8: Failing to claim for charitable donations
Some estimates put the value of eligible tax donations claimed by taxpayers as only about half of funds donated. That means that there is a ton of money being donated and not being claimed. One answer might be to take a more businesslike approach to these donations: carefully choosing an organisation or organisations and making the donation at a time that suits you, with June the time likely to be make the most sense for people as they plan for the end of the financial year.
9: Not claiming the $1000 tax exemption for employee share programs
Investors that are able to salary-sacrifice into employee share programs are able to claim an exemption on the first $1000 of the discount offered tax-free. Not everyone will have a scheme like this at their disposal but many Eureka Report subscribers working in listed companies will, and they need to be aware of this concession.
How it works is that if you salary sacrifice $20,000 worth of shares offered to you at a 20% discount then you are able to claim the first $1000 of your $4000 discount as tax-free, before paying the remaining $3000 at the marginal rate.
As I said, this won’t apply to everyone but this is potentially a big-ticket item! Don’t hesitate to ask your accountant for more details if you are unsure.
10: Failing to get organised
How much time are you spending on organising your tax return? Would you prefer to be doing something else?
The bottom line is that tax time is a measure of how organised you are. Where are the invoices for work-related expenses? Where are the receipts for charitable donations? Where are your dividend and interest statements? The best way to get on top of this paperwork is to pledge an oath to being organised at the start of the financial year so next year you can concentrate on making money … or playing golf.