Developing The Life Skill of Tax Filing – Part 1
As humans, we feel both positive and negative emotions at the end of year. For many, we take this time to reset and review our financial goals. This allows us to embrace the new possibilities that can happen. For others though, we feel anxious and uncertain for what’s coming. This can be largely due to the financial obligations that come with the season. One such obligation is tax filing! Like it or hate it, we all have to do it. Tax filing comes with adulting. A critical part of growing up is developing the life skill of tax-filing.
In this series, we clarify a couple of tax concepts that gets frequently mixed up. We also explain why it’s important to get them right in your tax filing. Let’s begin with the fundamentals:
Assessable Income versus Taxable Income
Assessable income is essentially all types of earnings that the tax authority wants to tax. Usually, this includes salaries, earnings from investments but excludes gifts and lottery winnings. This varies from country to country so it’s important to know what your tax authority includes in this bucket. (Fun fact: Singapore doesn’t tax profits from investments but Australia does. Both countries though doesn’t consider lottery winnings as assessable income!)
However, taxable income is the amount of earnings that we eventually get taxed on. This is derived by deducting expenses from assessable income. Such expenses can be costs incurred to earn income (For example, a laptop for remote workers or work gear for tradespersons). It can also be other allowed expenses (E.g. donations) that the tax authority allows us to claim.
When we file our tax, we will be required to provide information of our assessable income and deductible expenses. This will help the tax authority to calculate what our taxable income is.
As we develop the life skill of tax-filing, it is important to differentiate the 2 income concepts. Often we may want to earn as much as we can which increases our assessable income. Yet, we can also explore how to minimise our taxable income so we pay as little tax as we have to! The key to this is really making sure that you claim all the deductions that you are entitled to. Here’s a good article on what you can claim in Australia or Singapore.
When it comes to deductions though, that’s another concept we commonly confuse with tax offsets/ tax reliefs. We will look at this in our next part of this series on tax. To read on, here’s the article