The most frequent query I receive from higher income earners relates to how to reduce their income tax.
I’m pleased they ask, because the most common tax reduction method of the non-advised is one of the least appropriate, which is negative gearing a residential property. I believe that’s the least appropriate for most people because it concentrates your risk in one big volatile asset and the annual cash flow loss puts many people under pressure.
Instead, if you have surplus income here are the best three tax deductions I suggest you consider. One is a gift for others, two are gifts for you.
As you consider my suggestions remember that all tax deductions reduce your cash flow, that’s why you receive a deduction, so the principle is to get the most value for money for what you pay out.
I believe the purpose of money is to support a fulfilling life, and happiness research has demonstrated that helping others gives us a big buzz. So, if you’re blessed to feel you pay too much tax then sharing some of your surplus income with those less fortunate is excellent bang for your buck.
Income protection insurance
Your ability to earn an income is your most valuable asset, more valuable than your home or vehicle. Protecting your lifestyle in the event of illness or injury is a gift to your peace of mind and financial resilience.
Income protection insurance should be a foundation of your financial contingency plans. It’ll help you avoid needing to rely on the generous charitable donations of others if misfortune strikes. And the premiums for income protection insurance are generally tax deductible.
Deductible superannuation contribution
The third best tax deduction is a gift to your future self. Contributing your surplus income to superannuation as a deductible contribution gives the average income earner an immediate 30% return on investment (ROI) in the first year because of the tax saving. For higher income earners the first year ROI is even greater. You can waste a lot of time researching investments to get that high a return, or you could just regularly salary sacrifice to superannuation.
When using this tax reduction method keep an eye on the cap for concessional contributions, which currently is $25,000 per year. Employer, salary sacrifice and personal deductible contributions all count toward the cap. If you’re unsure seek professional advice.
My final tip for higher income earners is that instead of focussing on how much tax you’re paying, focus on how best to use your income to grow your net wealth toward financial independence. Tax is just one consideration in wealth creation, and it’s not even the most important.