Beginners guide to what is Income tax, Types of taxable income, and deductions

The process of filing a tax return is quite straightforward and for many, it has become an annual habit. Income tax is a reality for everybody who is making money. If you are new to online tax returns this article will help you understand the basics.

What is income tax?

Income tax is the tax paid on income. This income could come from your job, your business, or your investments. This is also applicable to selling an asset.

Types of taxable income

  • Employment income includes wages and salary, bonuses, allowances, fringe benefits, etc.
  • Government payments such as a pension, disability support, Newstart allowance, jobseeker allowance, etc.
  • Investment income includes bank interest and dividends
  • Business income includes the revenue that you generate from your business

How do I pay income tax?

If you are employed, income tax will be deducted from your salary or wages by the employer automatically. The money that you receive in your account is tax-free and the deduction has been made. When you are self-employed, you are accountable to pay your taxes.

Most taxpayers file an income tax return every year. It is a document that has a record of your income for the entire year. Your tax liability can be worked out using this. Sometimes it so happens that your employers have already paid the tax on your behalf and a little too much. In such cases, you are eligible for a refund.

What is a tax deduction?

Tax returns are also filed to claim deductions. These deductions reduce the taxable amount. It is likely to receive a tax refund when you find tax returns.

This is more than often money spent as part of your work. You are entitled to claim this as part of the tax deduction amount.

Here is a list of the deductions that you can claim.

  • Travel expenses
  • Laundry and dry cleaning expenses
  • Self-education expenses
  • Home office expenses
  • Tools and equipment for work
  • Cost of managing tax affairs
  • Gifts and donations
  • Investment income deductions
  • Purchase Price of an annuity and
  • Other personal contributions

It is important to claim only what you are entitled to. It does not harm double-checking anything you are looking to claim. This way you will make sure you are eligible for it. It is equally important to have proper documentation and receipts to support your claims.

Is income tax filing complicated?

It can be complicated especially if you are new to it. You can always opt for a tax agent who is a professional in handling these matters. He can ensure the accuracy of your return and file it on time. The best part is they can include deductions that you didn’t know you could claim!

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