Mind the Gap - Tax for teens

Script 7 - What is a Tax Deduction?

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Let’s say for a second that Hayden’s boss told him that he needed steel-capped boots for safety at work. So he goes out and he buys them. He just spent a whole bunch of his own money just for work.

That’s not so great.

He had to spend my own money to make money.
He had to spend my own wages to make more wages.

Say Hayden earns $500. The shoes cost him $100. Hayden has to pay tax, but does he pay tax on the $500 he receives, or on $400, which is how much he takes home after all the costs of having a job?

It wouldn’t really be fair to tax him on $500.

Let’s pretend for a minute, hypothetically only, that his shoes cost him $500. That means he actually earned nothing! But if the tax office still taxes him on $500, they’re taxing him on money he never got to keep! It wouldn’t be fair at all! If he receives nothing, then why would the tax office take a cut? There’s nothing to take a cut of!

The tax office is a little fairer than this. Certain expenses are deductible. A deduction is their way of saying you earned less, in the end, than what your payslips and summaries say you earned. By listing a deduction, you are reducing your income in the eyes of the tax office. And the lower your income is, the less tax you’ll pay. If you spend $500 on necessary deductions, your income is $500 less. If you have $1000 worth of deductions, your income is $1000 less. If you’re paying 10% tax, you’ll pay 10% of the income after deductions taken out. But as you’ve already paid your taxes in withholding, what that means is you’ll get more tax back in your refund.

The more deductions you claim, the bigger your refund will be. But you can’t just go around buying things just because you think they might be tax deductible – there are very strict rules on what you can deduct. It has to be used for work, and even then, it might not be deductible.

If you’re not sure what’s valid and what isn’t, keep all your receipts and give them to your tax agent if you have one. He’ll be able to help you figure it out. If you don’t have one, you’ll have to do the research yourself, using of the ATO website and by calling them.

Make sure you list all your valid deductions in your tax return at the end of the financial year and sent it off to the ATO. That way the ATO can take them into account when they figure out all your tax stuff. Otherwise, you’ll miss out.

But remember: keep your receipts!
Deductions are all done at the end of the year, not as you go. If you don’t keep records, you won’t be able to make the deductions when the time comes. The ATO has an app called “MyDeductions” which can be a great tool for keeping track throughout the year.

Tax deductions might seem great when you get your refund, but remember, you still had to pay for those expenses out of your own wallet. Whilst you’ll get some of it back, you won’t get it all. You only get back the portion of it that you would have paid in taxes.

Deductions make those expenses income-tax-free, not completely free.

So! Keep an eye out for any money you’re spending for work, and check that it’s a valid deduction with the ATO. Then, you’re set.