What’s The Difference Between Tax Deductions, Tax Rebates And Tax Credits?

Tax Accountant Brisbane - Small Business Accountant Forest Lake - Total Tax > Blog > End Of Financial Year > What’s The Difference Between Tax Deductions, Tax Rebates And Tax Credits?

Keep More Of Your written on the roadWhen it comes to working out how much tax you need to pay, less is almost always better. But how can you – legally – reduce your taxable income? Here are explanations of a few common tax time terms that you’ve probably heard hundreds of times, but may not be entirely clear about (they are listed in order from least to greatest impact on your taxable income).

Tax deductions: in order to calculate your taxable income, you calculate your assessable income minus any applicable deductions. For most people, assessable income will be your salary plus any additional income, such as rent received – if you own an investment property – and dividends on shares you might own. Deductions will be expenses you can legitimately claim. Common deductions include: interest you paid on your investment property loan (but not on your own home loan); vehicle and travel expenses (for travel directly connected with your work – not including travel to and from work); donations to charity over $2; expenses relating to there shares you own); tools and equipment (if used to earn your income); self-education expenses; clothing and cleaning expenses (for things like distinctive uniforms and protective clothing), and some home office expenses (if used to earn income). Some deductions have maximum thresholds, and some deductions require specific proof of the expense, so it is advisable to get advice around what you can deduct.

While deductions are the most common tax-reducing item for the average person, they are also less effective than both rebates and credits. This is because a deduction is deducted from your assessable income before tax is calculated, so it reduces your tax by the amount of the deduction, multiplied by your tax rate [EXAMPLE: a tax deduction of $1,000 would reduce your assessable income by $1,000, which – if your marginal tax rate was 37% – would reduce your tax payable by $370 ($1,000 x 0.37)]

Tax offsets (rebates): commonly referred to as rebates, tax offsets are deducted from your tax payable, so in the example above, a tax offset would reduce your tax payable by the full $1,000, rather than $370 as the deduction did. However, while offsets can reduce your tax payable to zero, it can’t result in a refund. In this regard, it is less desirable than a tax credit. Some rebates include: taxpayers with dependents (if you maintained a spouse or dependent who is an invalid or carer – in either case, they will generally have to have received government support for their circumstances); Low income tax offset (if your income falls under certain thresholds); zone and overseas forces rebates (if you live in a remote area of Australia or are overseas as a member of the armed forces, police or UN), and superannuation tax offsets.

Tax credits: by far the most common tax credit is income tax your employer has already deducted from your salary throughout the year (which is also the most likely reason you might get a tax refund each year). Another common credit is imputation credits, relating to franked dividends from a company you own shares in. In this case, the company has already paid 30% tax on the dividend, so that amount is credited towards your tax payable.

Like rebates, tax credits reduce your tax payable by the full amount of the credit. Unlike rebates, a tax credit can result in a tax refund once your tax payable reduces below zero. In this regard, tax credits are the most desirable of the tax reducing benefits to have.

By Jennifer Lowe

The post What’s The Difference Between Tax Deductions, Tax Rebates And Tax Credits? appeared first on Total Tax.