Do I say yes or no to tax-free threshold? It’s a question that many of us have asked ourselves. The tax-free threshold is a benefit that the government offers, allowing us to earn a certain amount without paying any taxes. It sounds too good to be true, right? But before you make your decision, let’s take a closer look at what it really means for your finances.
Firstly, let me explain what the tax-free threshold is. For the 2021-2022 financial year, the tax-free threshold is $18,200. This means that if you earn less than this amount as an individual, you won’t have to pay any income tax at all. However, if you earn more than this amount, the tax rate increases in increments. Understanding this concept is crucial when deciding whether to say yes or no to the tax-free threshold.
It’s important to note that the tax-free threshold is not a straightforward decision. There are pros and cons to both options, and what works for one person may not work for another. That’s why it’s important to consider your individual circumstances before you make a choice. So, do I say yes or no to tax-free threshold? Let’s dive deeper and explore the factors that could help you make an informed decision.
Understanding the Tax Free Threshold
When starting a new job, you will be asked to fill out a tax file declaration form, which includes the question of whether or not you want to claim the tax free threshold. The tax free threshold is the amount of income you can earn without paying any income tax. For the financial year 2020-2021, this amount is $18,200.
- Claiming the tax free threshold will reduce the amount of tax taken out of your pay each week or fortnight, which means more money in your pocket.
- If you do not claim the tax free threshold, you will still receive it at the end of the financial year when you lodge your tax return.
- If you have more than one job or receive income from other sources, you will need to ensure that you do not claim the tax free threshold on all of your jobs or income streams to avoid having a tax debt at the end of the financial year.
It is important to note that if you earn above the tax free threshold, you will start paying income tax on any additional income. The current income tax rates in Australia for the 2020-2021 financial year are as follows:
| Taxable Income | Tax on This Income |
|---|---|
| $0 – $18,200 | $0 |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37c for each $1 over $120,000 |
| Over $180,000 | $51,667 plus 45c for each $1 over $180,000 |
Overall, understanding the tax free threshold is important for making informed decisions about your tax and financial situation. Consider your individual circumstances and consult a financial advisor or accountant if you need personalized advice.
Benefits of claiming the tax-free threshold
When it comes to filing your taxes, one of the most important decisions you’ll have to make is whether to claim the tax-free threshold. This can be a bit confusing for some, so in this article, we’ll explore the benefits of claiming the tax-free threshold and help you determine whether it’s the right choice for you.
- Pay less tax: By claiming the tax-free threshold, you can reduce the amount of tax you pay throughout the financial year. This is because you’ll be able to earn a certain amount of income before you start paying tax, which can be incredibly beneficial for those who are on a lower income.
- Increased cash flow: By reducing the amount of tax you pay, you’ll have more money in your pocket each pay cycle. This can be a huge help for those who are living paycheck to paycheck, or who are working multiple jobs and need as much cash flow as possible.
- Reduced end of year tax bill: Filing your taxes can be a stressful experience, especially if you find out that you owe a large sum of money at the end of the financial year. By claiming the tax-free threshold, you can reduce the amount of tax you owe, which can help ease some of the financial stress that comes with tax time.
So now that we know some of the benefits of claiming the tax-free threshold, let’s take a look at whether it’s the right choice for you.
It’s important to note that not everyone will benefit from claiming the tax-free threshold. For example, if you’re a high income earner, you may find that claiming the threshold doesn’t make much of a difference to your overall tax bill.
Another thing to consider is how much income you’re likely to earn throughout the financial year. If you’re not likely to earn enough to reach the tax-free threshold, then there’s no point in claiming it.
Ultimately, whether or not you should claim the tax-free threshold will depend on your individual circumstances. It’s important to speak with a tax professional if you’re unsure about what’s best for you.
| Income Range | Tax-free Threshold |
|---|---|
| $0 – $18,200 | $0 |
| $18,201 – $37,000 | $18,200 |
| $37,001 – $90,000 | $37,000 |
| $90,001 – $180,000 | $37,000 |
| $180,001+ | $0 |
As you can see from the table above, the tax-free threshold varies depending on your income. Be sure to do your research and speak with a tax professional so that you can make an informed decision about whether or not to claim the tax-free threshold.
How tax rates change when claiming the tax free threshold
One of the most common questions taxpayers have is whether they should claim the tax free threshold or not. The answer really depends on your individual circumstances, as it can affect your tax rate and ultimately, how much you owe to the ATO.
- Claiming the tax free threshold means you can earn up to $18,200 in a financial year before you have to pay any tax.
- If you don’t claim the tax free threshold, you’ll start paying tax from your first dollar earned.
- If you’re eligible for the tax free threshold but don’t claim it, you’ll end up paying more tax than you need to.
While claiming the tax free threshold can help reduce your overall tax bill, it’s important to note that your tax rate will change depending on how much you earn. The table below outlines the different tax rates for the 2021/22 financial year:
| Taxable Income | Tax on this Income | Taxable Income | Tax on this Income |
|---|---|---|---|
| $0 – $18,200 | NIL | $90,001 – $180,000 | $20,797 + 37c for each $1 over $90,000 |
| $18,201 – $45,000 | 19c for each $1 over $18,200 | $180,001 and over | $54,097 + 45c for each $1 over $180,000 |
| $45,001 – $120,000 | $5,092 + 32.5c for each $1 over $45,000 |
So, while claiming the tax free threshold can be beneficial, it’s important to understand how your tax rate will change depending on your income. It’s always a good idea to speak with a tax advisor or accountant if you’re not sure what your best option is.
Consequences of not claiming the tax free threshold
Deciding whether or not to claim the tax free threshold can be a tough decision for many people. While claiming the threshold can result in a lower amount of tax taken out of your paycheck, not claiming it can have several consequences that should be considered before making a decision.
- Higher taxes: By not claiming the tax free threshold, you are essentially telling the government to take out more tax from each paycheck. This means you will end up paying more tax over the course of the year, and could result in a smaller tax refund or even owing money to the government at the end of the financial year.
- Less money in your pocket: Not claiming the tax free threshold means less money in your paycheck. While this may not seem like a big deal, over the course of a year it can add up to a significant amount of money that you could be using to pay off debt, save for the future, or invest.
- Lost opportunity for savings: While claiming the tax free threshold may not result in a huge increase in your take-home pay, it can still mean more money in your pocket over the course of a year. By not claiming the threshold, you miss out on an opportunity to save that extra money or put it towards something important.
Examples of the consequences
Let’s take a look at a few examples to see how not claiming the tax free threshold can impact your finances.
| Annual Salary | Tax Claimed | Paycheck (Weekly) | Take Home Pay (Weekly) |
|---|---|---|---|
| $50,000 | Not claimed | $961.54 | $731.54 |
| $50,000 | Claimed | $961.54 | $801.56 |
| $75,000 | Not claimed | $1,442.31 | $1,112.31 |
| $75,000 | Claimed | $1,442.31 | $1,182.30 |
As you can see from these examples, not claiming the tax free threshold can result in a significant reduction in take-home pay each week. Over the course of a year, this can add up to thousands of dollars lost.
Who is eligible for the tax free threshold
One of the most common questions people ask regarding the tax free threshold is who is eligible for it. In short, the answer is that Australian residents are eligible to claim the tax free threshold as long as they earn under a certain income level. Let’s dive deeper into the specifics:
- The tax free threshold is available to Australian residents for tax purposes.
- The threshold is not available to non-residents for tax purposes.
- Individuals with a taxable income of $18,200 or less in the financial year are generally eligible for the tax free threshold.
- If you are under 18 years old and earn less than $416 during a financial year, you are also eligible for the tax free threshold.
- The tax free threshold is not available for those who earn a salary from an employer and have not provided them with their Tax File Number (TFN).
It is important to note that specific situations may affect one’s eligibility for the tax free threshold, such as being a foreign resident for tax purposes or having multiple sources of income. If you are unsure about your eligibility, it is best to consult with an accountant or tax professional.
Exceptions to the Tax Free Threshold
While Australian residents are generally eligible for the tax free threshold, some exceptions to this rule exist:
- If you have more than one job, secondary employers are required to withhold tax at the higher, “no tax-free threshold” rate.
- If you receive certain government benefits such as a job seeker allowance, you may not be eligible for the tax free threshold, and tax may be withheld from your payments at a higher rate.
- If you are a foreign resident for tax purposes, you generally won’t be eligible for the tax free threshold.
The Benefits of Claiming the Tax Free Threshold
Claiming the tax free threshold can have significant advantages, including:
- Reducing the amount of tax you pay in a financial year.
- Increasing your take-home pay, as less tax is withheld from your pay packet throughout the year. This can help with budgeting and personal savings goals.
- Ensuring that your tax obligations are met correctly, as failing to claim the threshold when eligible may result in penalties or additional tax payments required.
| Taxable Income | Tax on This Income |
|---|---|
| $0 – $18,200 | No tax |
| $18,201 – $45,000 | 19c for every $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5c for every $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37c for every $1 over $120,000 |
| $180,001 and over | $51,667 plus 45c for every $1 over $180,000 |
Overall, understanding your eligibility for the tax free threshold is essential for accurate tax planning, budgeting, and financial management.
Common misconceptions about the tax free threshold
One of the most misunderstood aspects of the Australian tax system is the tax-free threshold. Below are some of the common misconceptions that people have about the tax-free threshold:
- Myth 1: Claiming the tax-free threshold means I have to pay less tax overall.
- Reality: The tax-free threshold only means that the first $18,200 of your income is tax-free. After that, you will be taxed at the relevant tax rate for your income bracket. Claiming the tax-free threshold does not mean that you pay less tax overall, but rather that you pay less tax on the first $18,200 of your taxable income.
- Myth 2: If I earn below the tax-free threshold, I don’t need to lodge a tax return.
- Reality: Even if you earn below the tax-free threshold, you may still need to lodge a tax return. For example, if you had tax withheld from your pay during the year, you will need to lodge a tax return to get your refund. Additionally, if you received any income from interest, dividends or rental properties, you will need to report this income and may need to pay tax on it.
- Myth 3: If I have multiple jobs, I can claim the tax-free threshold on each job.
- Reality: You can only claim the tax-free threshold on one job at a time. If you have multiple jobs, you will need to choose which job to claim the tax-free threshold on.
Wrap up
Understanding the tax-free threshold is important for every taxpayer. By knowing the reality behind these misconceptions, you can make informed decisions about claiming the tax-free threshold and avoid any potential penalty or interest charges from the ATO.
How to claim the tax free threshold on your tax return
If you’re an Australian resident for tax purposes, you’re entitled to claim the tax-free threshold on your tax return, which means you won’t pay any tax on the first $18,200 of your income. However, if you don’t claim the tax-free threshold, you’ll have to pay tax on all of your income. So, when should you say yes or no to the tax-free threshold? Here are a few things to consider.
- If you have more than one job, make sure you only claim the tax-free threshold from one employer. If you claim it from both, you’ll end up owing tax at the end of the financial year.
- If you receive income from other sources, such as investment properties or dividends from shares, you may want to consider not claiming the tax-free threshold to avoid a tax bill at the end of the year.
- If you have a lot of deductions, such as work-related expenses or self-education expenses, you may want to claim the tax-free threshold to reduce the amount of tax you have to pay.
Now that you’ve decided whether to claim the tax-free threshold, here’s how to do it on your tax return:
- When you fill out your Tax file number declaration form, tick the box to claim the tax-free threshold.
- Enter the tax-free threshold amount of $18,200 in the “Tax-free threshold” section of your tax return.
It’s important to remember that if you’re unsure about whether to claim the tax-free threshold or not, it’s best to seek advice from a tax professional.
Wrapping Up
Claiming the tax-free threshold is a great way to reduce the amount of tax you have to pay, but it’s important to consider your individual circumstances before deciding. Remember to only claim the tax-free threshold from one employer if you have multiple jobs and to seek professional advice if you’re unsure.
| Subsection | Type | Description |
|---|---|---|
| Claiming the tax-free threshold | Text | An explanation of when to say yes or no to the tax-free threshold |
| How to claim the tax-free threshold | Text | A step-by-step guide on how to claim the tax-free threshold on your tax return |
| Considerations | List | A list of factors to consider when deciding whether to claim the tax-free threshold |
By following these tips, you can ensure that you’re making an informed decision and maximising your tax savings.
FAQs about “Do I Say Yes or No to Tax-Free Threshold”
1. What is a tax-free threshold?
A tax-free threshold is the amount of income that you can earn before you start paying tax. In Australia, the tax-free threshold is currently set at $18,200.
2. Should I claim the tax-free threshold?
If you are an Australian resident and you earn less than $18,200 per year, you should claim the tax-free threshold. This will reduce the amount of tax you have to pay on your income.
3. What happens if I don’t claim the tax-free threshold?
If you don’t claim the tax-free threshold and you earn less than $18,200 per year, you will end up paying more tax than you should. This means that you will have less money in your pocket.
4. What if I earn more than $18,200 per year?
If you earn more than $18,200 per year, you should still claim the tax-free threshold. However, you will start paying tax on any income you earn over the threshold.
5. Can I change my mind about claiming the tax-free threshold?
Yes, you can change your mind about claiming the tax-free threshold at any time. You can do this by filling out a new Tax File Number declaration form and submitting it to your employer.
6. Why is it important to understand the tax-free threshold?
Understanding the tax-free threshold can help you to manage your finances better. By claiming the threshold, you can reduce the amount of tax you have to pay and keep more money in your pocket.
Closing: Thanks for Reading!
We hope this article has helped you understand the tax-free threshold and how to make the most of it. Remember, if you earn less than $18,200 per year, you should claim the threshold to reduce your tax bill. And if you ever change your mind, you can always update your Tax File Number declaration form. Thanks for reading, and please visit us again for more helpful articles!