How to Get More Tax Free Income In Retirement

How to Get More Tax Free Income In Retirement, By Annette Sampson May 18, 2005 How to Get More Tax Free Income In Retirement? You might have thought last week's budget was a dead loss for retirees. But for many retirees, they have raised the level of income that you can earn before you have to worry about paying tax.

If you're of pensionable age, for example, and eligible for the Senior Australians Tax Offset, the drop in the 17 per cent marginal tax rate to 15 per cent from next year, means you'll be able to earn almost $1500 a year more before paying tax.

The Government says singles will be able to earn up to $21,968 before paying tax - up from $20,500 this year - and couples will be able to earn up to $36,494 (depending on the income of each), up from $33,612.

The Medicare levy threshold for seniors will also be increased to ensure seniors don't have a Medicare liability before they start to pay tax.

Even if you earn more than this, you get a partial benefit. With the new tax rates, the levels at which the offset phases out have increased to $39,808 for singles (up from $38,340) and $31,063 each (up from $29,622) for couples.

Thanks to the lower tax rates, people using retirement pension products will also be able to earn more before paying tax. According to MLC, couples who both have a retirement income stream will be able to receive up to $58,348 tax-free (up from $54,790) and singles $33,149 (up from $31,350.

How do these things work? The offset, according to Asteron's head of technical services, Louise Biti, is worth $2230, and $1602 each for couples. If you earn less than the low-income threshold (that's the $21,968 and $36,494 figures we referred to earlier), you can use the full offset (plus the low income tax offset) to wipe out your tax liability. If you earn more than this, says Biti, you lose 12.5 cents for each extra dollar you earn. You lose the benefits of the offset altogether at the maximum income thresholds we discussed earlier in the column.

One of the nicer aspects of the offset for couples is that while the actual amount of the offset is calculated on each partner's individual income, if you or your spouse have any offset that you can't use you can transfer the unused portion to the other to reduce that person's tax bill.

There's also a pensioners' tax offset that works in the same way for people who get the age pension.

With the retirement income products, the benefits of the offsets are compounded by the 15 per cent tax rebate that applies to pensions bought using super money that attracted a tax deduction. In a budget briefing paper, BT Financial Group used the example of Michael and Jennifer who each earn $29,172 from a pension product. This income attracts $4,611 each in tax, but the 15 per cent rebate eliminates $4375 of this. That leaves $236 in tax each, but this is wiped out by the seniors offset.

Were there any other benefits for retirees in the budget? A couple of small ones. One benefit was that the new mature age worker tax offset has been extended to include people who carry on a business in partnership. This offset is worth up to $500 for workers over 55 who earn up to $58,000 this year and $63,000 next year in "net working income" - income you earn from personal exertion rather than passive income such as income from investments. Other measures included extending the seniors concession allowance - a $200 annual payment to holders of Commonwealth Seniors Health Care Cards - to people who have a Department of Veterans' Affairs Gold Card and making the concession allowance, and the $100 annual utilities allowance payable to people of age pension age who receive income support, exempt from tax. How to Get More Tax Free Income In Retirement