Role of Low Income Tax Offset in Tax Planning: Maximize Your Tax Benefits

Tax liabilities for low-income earners are a nightmare. But! The Australian government’s Low Income Tax Offset (LITO) offers significant financial relief.

The low income tax offset is a tax benefit provided by the Australian government. It is to assist low income earners by reducing tax liabilities. For the tax year 2024, income tax offset LITO remains an integral part of the tax system. The purpose was to alleviate the financial burden on those with low income.

This article provides a comprehensive guide to LITO. So, get ready to make the most out of your tax offset.

Eligibility Criteria

From 1 July 2022, you are eligible for Low Income Tax Offset only. This means that if you earn up to $66,667, you can claim LITO. Before that, between 2018-19 and 2021-22, you may have been eligible to receive Low Income Tax Offset and Low- and Middle-Income Tax Offset.

• If you earn up to $66,667, you are eligible for LITO.
• If you earn up to $126,000, you are eligible for income tax offset LMITO.

LMITO ended on 30 June 2022. The income year 2021-22 was the last year of LMITO.

To qualify for LITO in 2024, the following are the eligibility criteria:

1. The taxpayer must be a resident of Australia for tax purposes. This means that the individual must have resided in Australia for a major part of the tax year. Moreover, they should have an intention to reside in Australia permanently.
2. LITO applies to individuals with taxable incomes below a certain threshold.
3. Taxpayers with incomes up to $37,500 are eligible for full LITO.
4. Taxpayers with income between $37,501 and $66,667 receive partial LITO. It will phase out as the income increases. 

Calculating the LITO

LITO is calculated based on the taxpayer’s taxable income. Here’s how the offset is applied:

1. Taxpayers earning up to $37,500 are entitled to a maximum tax offset of $700. The amount is subtracted directly from the tax owed.
2. For those earning between $37,501 and $45,000, the offset reduces by 5 cents per dollar earned over $37,500.
3. Between $45,000 and $66,667, the offset further reduces by 1.5 cents per dollar over $45,000.

Note: LITO is non-refundable. This means that it can reduce your tax payable to zero. But any excess offset amount cannot be refunded to you.

How to Receive Tax Offset

To receive your tax offset, you just need to lodge your tax return. Australian Taxation Office (ATO) works on your offset after you lodge. The tax offset can be seen on your notice of assessment under the section “Less non-refundable tax offsets.” These offsets reduce the amount of tax you owe. But they only reduce your tax liability to $0. They are not separate payments. Any unused portion of the offsets cannot be refunded.

Suggested Read: ​​Tax Refund Decoded, From Myths to Mastery for Self-Employed

Medical Levy Low-Income Thresholds 2024

The has confirmed the increase to the Medicare levy thresholds announced on January 25, 2024. These new thresholds aim at providing cost-of-living relief. They were enacted through the Treasury Laws Amendment (Cost of Living – Medicare levy) Act 2024.

The following are the changes:

1. For the income year 2023-24, the government increased the Medicare levy low-income threshold for singles to $26,000. For the year 2022-23, it was $24,276.
2. For couples with no children, this threshold became $43,846. For the previous income year, it was 24,276.
3. The additional threshold amount for each dependent child or student is increased from $3,760 to $4,027.
4. For single seniors and pensioners eligible for the Seniors and Pensioners Tax Offset (SAPTO), the Medicare levy low-income threshold is increased to $41, 089. It was previously $38,365.

Practical Advice for Incorporating the Low-Income Tax Offset (LITO) into Tax Planning for 2024

The Low-Income Tax Offset (LITO) can significantly reduce tax liabilities for low-income earners. Following are a few strategies to incorporate LITO into your tax planning and financial management for the tax year 2024:

1.      Understand Your Eligibility

Ensure that you are an Australian resident for tax purposes. For the 2024 tax year, the maximum LITO is $700. It is fully available for those with taxable incomes up to $37,500. It phases out gradually. At the income of $66,667, it becomes zero​.

2.      Accurately Report Your Income

Ensure that you correctly report all sources of income on your tax return. Inaccurate reporting affects your eligibility for LITO and other tax benefits.  Use reliable tax software. Choose the one that can automatically calculate your eligibility and apply for LITO.

Make sure you don’t miss out on an offset due to calculation errors. Taxly.ai is your AI-powered tax assistant. Simply connect your bank account information. AI detects the eligible deductions and automate every step. 

3.      Adjust your Financial Plans

Know that Low- and Middle-Income Tax Offset (LMITO) is not in effect now. This means that if your income falls under the middle income range, you may receive a lower overall tax offset compared to previous years. Adjust your financial plans accordingly. Review your budget plans and savings. Ensure that you can cover the potentially higher tax liabilities.

4.      Claim all Eligible Deductions

Make sure you claim all other eligible deductions and offsets than LITO. These include work-related expenses, charitable donations, and education expenses. Consider making additional contributions to your superannuation fund. This can reduce your taxable income. Thus, potentially increasing the benefit from LITO.

5.      Effective Planning

Your effective tax-free threshold increases with LITO. For instance, with full LITO, the tax-free threshold effectively increases from $18,200 to $21,885. Plan your finances to optimize this threshold​.

6.      Consult a Professional

Consult a tax professional for tailored advice. They can help you better understand the tax laws. Moreover, they can optimize your tax position. Thus, ensuring compliance with all the rules and regulations. Also, engage in tax planning services. They can offer strategic advice on managing your income and deductions throughout the year to maximize tax benefits.

7.      Stay Informed on Tax Law Changes

Stay informed about any changes that could affect your LITO eligibility or amount. These include changes in tax laws or thresholds. Regularly visit the Australian Taxation Office (ATO) website. This is a reliable source for the latest updates.

Upcoming Changes and Planning for July 2024

Stage 3 tax cuts are going to take effect from 1 July 2024. These cuts will further reduce the marginal tax rate for many middle income earners. It is essential to stay informed about these tax cuts and understand how they might impact your tax planning. By keeping up-to-date with these changes, you can better prepare for paying tax in the future.

Bottomline

The Low-Income Tax Offset is an essential tool for low-income earners in Australia. Thus, significantly contributing to financial stability. A better understanding of LITO can effectively optimize your financial outcomes.

Follow these practical tips and strategies and take control of your financial future. Maximize your benefits from the personal income tax system.

References:

[1] Personal tax and superannuation

[2] Low Income Tax Offset

[3] Low and middle income earner tax offsets

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