facebook
 

Tax Blogs

Income Protection | 2023 Gotax

June 25, 2023

Why You Need Income Protection Insurance (And How It Can Save You Money On Tax)

If you're like most Australians, you work hard to earn your income and support your lifestyle. But what if something happens to you and you can't work for a while? How would you pay your bills, your mortgage, your kids' school fees? That's where income protection insurance comes in handy.

Income protection insurance is a type of insurance that pays you a regular amount of money if you get sick or injured and can't work for a certain period of time. It usually covers up to 70% of your income and can last for a few months or until you turn 65.

But income protection insurance is not just good for your peace of mind. It's also good for your wallet. That's because you can claim the cost of your income protection insurance premiums as a tax deduction. This means that you can lower your taxable income and pay less tax by having income protection insurance.

Sounds good, right? But before you rush to buy a policy, there are some things you need to know.

First, you can only claim the premiums for policies that are outside your super fund.

Second, you can't claim the premiums for policies that cover other things like death, trauma or permanent disability.

Third, you need to keep track of your premiums and any payments you get from your policy.

To show you how income protection insurance can save you money on tax, let's look at an example. Sam is a full-time electrician who earns $100,000 a year before tax. He pays $1,200 a year for an income protection policy that covers 70% of his income for up to two years if he can't work due to illness or injury. Sam doesn't have any other deductions on his tax return.

Without income protection insurance, Sam would pay $24,632 in tax for the year. With income protection insurance, he can claim his $1,200 premium as a deduction and lower his taxable income to $98,800. This means he would pay $24,092 in tax for the year, saving $540.

Now imagine that Sam has a bad accident and can't work for six months. He gets $35,000 in income protection payments from his policy during this time. These payments are taxable as normal income, so Sam has to include them on his tax return. But he can also claim his $1,200 premium as a deduction again.

Without claiming his premium as a deduction, Sam would pay $4,492 in tax on his income protection payments. By claiming his premium as a deduction, he would lower his taxable income to $33,800 and pay $3,942 in tax on his income protection payments, saving $550.

As you can see, income protection insurance can save you money on tax in two ways: by lowering your taxable income when you pay your premiums and by lowering your taxable income when you get your payments. Of course, the main reason to have income protection insurance is that it gives you financial security and peace of mind if something unexpected happens to you.

Income protection insurance is not just good for your peace of mind. It's also good for your wallet.

If you want to find out more about income protection insurance and how it can suit your needs and budget, visit gotax.com.au today. We can help you compare policies from some of Australia's biggest providers and find the best deal for you.

Get your tax return done quickly, easily and happily with Gotax.com.au.

 

Leave a Comment