How to Maximise Your Tax Refund in New Zealand
Maximising your tax refund is a smart way to ensure you get the most out of your hard-earned money. By understanding the deductions and credits available, you can significantly reduce your taxable income and increase your refund. Here’s a comprehensive guide tailored for the local market to help you navigate the process effectively.
Understanding Deductions and Credits
Tax deductions reduce the amount of income that is subject to tax, while tax credits reduce the amount of tax you owe. Knowing which expenses are deductible and how to claim them correctly is crucial for maximising your tax refund.
Key Deductible Expenses
1. Work-Related Expenses
While most employment-related expenses are not deductible, there are specific costs you can claim:
- Income Protection Insurance: If the insurance payout is taxable, the premiums are deductible. Check with your insurance provider to confirm if your policy qualifies.
- Tax Agent Fees: Fees paid to an accountant or tax agent for preparing and filing your tax return are deductible. Keep receipts and invoices as proof.
- Commission on Investment Income: If you earn income from interest or dividends, you can claim any commission charged on this income, excluding bank fees.
- Interest on Borrowed Money for Investments: Interest on loans taken to invest in shares or other taxable income-producing investments is deductible.
2. Charitable Donations
Donations to approved charities can be claimed as a tax credit. You can claim 33.33% of the total donations made, up to the amount of your taxable income. Ensure you keep receipts for all donations to support your claim.
3. Home Office Expenses
If you work from home, you can claim a portion of your household expenses. This includes:
- Utilities: A proportion of your power, internet, and phone bills can be claimed based on the area of your home used for work.
- Mortgage Interest or Rent: A portion of your mortgage interest or rent can be claimed if you use part of your home exclusively for business.
- Depreciation: You can claim depreciation on office furniture and equipment used for work purposes.
4. Vehicle Expenses
If you use your vehicle for work purposes, you can claim a portion of the expenses. This includes fuel, maintenance, insurance, and depreciation. Keep a logbook to track the business use of your vehicle accurately.
Strategies for Maximising Your Tax Refund
1. Keep Detailed Records
Maintaining accurate and detailed records is crucial for maximising your deductions. This includes keeping receipts, invoices, and any other documentation that supports your claims. The Inland Revenue Department (IRD) requires you to keep these records for at least seven years.
2. Use Accounting Software
Utilising accounting software can streamline the process of tracking expenses and income. Many software options automatically categorise expenses and generate reports, making it easier to prepare your tax return and ensure you don’t miss any deductions.
3. Regularly Review Your Expenses
Periodically reviewing your expenses can help you identify additional deductions. For instance, if you’ve recently started working from home more frequently, you might be eligible to claim a larger portion of your home office expenses.
4. Consult a Tax Professional
A tax professional can provide personalised advice and help you identify deductions you might not be aware of. They can also assist in ensuring your tax return is accurate and compliant with current tax laws.
Recent Tax Changes
Staying informed about recent tax changes can help you maximise your deductions. For example, recent adjustments to personal income tax thresholds and the reintroduction of interest deductibility for residential properties can impact your tax situation.
- Interest Deductibility: From 1 April 2024, interest on loans for residential properties will be 80% deductible, increasing to 100% from 1 April 2025. This change can significantly affect property investors.
- Personal Income Tax Thresholds: Adjustments to income tax thresholds mean that more income will be taxed at lower rates, potentially reducing your overall tax liability.
Common Pitfalls to Avoid
1. Overclaiming Deductions
Ensure that you only claim deductions you are entitled to. Overclaiming can lead to penalties and interest charges if the IRD audits your return and finds discrepancies.
2. Not Keeping Adequate Records
Failing to keep proper records can result in denied deductions. Always keep receipts, invoices, and other supporting documents for all claimed expenses.
3. Ignoring Small Deductions
Small deductions can add up over time. Don’t overlook minor expenses like stationery, small business-related purchases, or minor repairs, as they can collectively reduce your taxable income.
Additional Tips for Maximising Your Refund
1. Claim All Eligible Credits
Make sure you claim all eligible tax credits, such as the independent earner tax credit and the in-work tax credit. These credits can provide significant tax relief.
2. Review Your Tax Code
Ensure you are using the correct tax code. Using the wrong tax code can result in overpaying or underpaying tax. If you have multiple sources of income, consider using a secondary tax code to ensure the correct amount of tax is deducted.
3. File Your Return on Time
Filing your tax return on time helps you avoid late fees and penalties. It also ensures you receive your refund as quickly as possible.
Maximising your tax refund requires a thorough understanding of allowable expenses, diligent record-keeping, and staying informed about tax law changes. By implementing these strategies, you can reduce your tax liability and increase your refund. Whether you manage your taxes independently or seek help from a professional, being proactive and organised can lead to significant savings.