Money Series: Zen and the art of filing a tax return

This is the seventh article in a series on money I’m writing. If you haven’t read the previous articles, start here. The purpose of this series is to maximise your enjoyment of your life’s journey.

In the previous article we explored unconditional giving. Now, let’s discuss how to confidently and calmly file a tax return.

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If paying tax doesn’t feel calm, it just means you need a better system.

Here are some systems:

1. 🏢 Pay an accountant to help you
2. 📱 Pay an app like Hnry to help you
3. 👷 Do it yourself. Write down the steps and improve them over time.

This article focuses on the third one, however, the principles in here will help you pay your taxes more calmly, whichever system you use.

Do I need to file a tax return?

Everyone that earns income files a tax return, however the important thing to know about New Zealand is that the IRD has ⚙️ automated ⚙️ this for people whose only income is salary, wages or investment income that’s already taxed, like bank deposits or savings interest. When the IRD automates the filing of your tax return, this is known as an income tax assessment.

For many years, my partner’s only source of income was her salary. She didn’t have any investments, so the IRD automatically filed her income tax assessment at the end of every tax year. She didn’t have to lift a finger. Easy!

For the rest of us, if we received more than $200 (before tax) in income for the previous tax year that the IRD doesn’t know about, whether that be from a business, a rental property, investments (including reinvested dividends that don’t get automatically reported to the Income Summary section when you log into myIR) [1], an ‘under the table’ cash job, overseas income or elsewhere, we need to file an individual tax return, known as an IR3.

An IR3 tells the tax office about your income and the expenses you’re claiming. Plus, it also calculates if you’re due a refund or have tax to pay.

I invest in index funds, plus I earn a little self-employed income and sometimes even some overseas income, so I file an IR3 every year. [2]

For some fun stories on what happens if you don’t declare income the IRD doesn’t know about, read this.

Update your details

Each year, the IRD publishes this helpful end of tax year article. 

A quick win you can do right now is to follow the instructions in the article to make sure your details are up to date. This will ensure you receive any correspondence the IRD sends. 📮

If you haven’t been receiving emails from the IRD, check your spam. Move those emails to your inbox to start training your email provider that these are super important emails that need to go to your inbox.

In the same way that we are going to create a system for ourselves to make paying taxes easy, the IRD has a pretty epic system to make collecting taxes easy! Making sure your details are always up to date and that you’re receiving emails the IRD sends is the best first step to paying taxes calmly.

Why bother doing it yourself?

These are the reasons why I file my own tax return:

• 🇳🇿 In New Zealand, the IRD makes it incredibly easy, compared to other countries. We are very lucky to live in a country where the Government empowers people to file their own tax returns.
• 💰 Over the 9 years I’ve been filing my own tax return in New Zealand, I’d estimate I’ve saved somewhere between $5000 to $10,000 by…
  a) Not needing to pay an accountant or an app like Hnry and
  b) Understanding the tax code by reading articles on the IRD website and finding mistakes my employer has made when reporting my income to the IRD, such as reporting the incorrect amount, thereby making sure I pay the exact right amount of tax.
• ✍️ Once you’ve written a set of instructions on how to file your tax return, it’s easy to file your return each year.
• 🎉 I get to help friends occasionally with a tax question they may have. Saving your friends money is a lot of fun.
• 👻 Ghosts are not that scary when you get to know them. I love learning about a side of money that most people opt out of. Everything is completely transparent when I file my own return. When I used to live in Australia, I worked with various accountants to pay my tax (their system is more complicated) and I never liked the feeling of handing everything off and then them coming back and being like, “Surprise! Here’s the outcome…” Where money is involved, I like to know what’s going on inside the black box.

The next time you do something that you’ve never done before, but that you know you will need to do again at some point, write down what you do as you do it. Then, the next time you do that thing, follow your instructions and update them. Share your instructions with other people who are facing the same issue. It’s one of the most underrated ways to help people, let alone help yourself!

These days, I’ve got filing my tax return down to 5 simple steps that fit on one page. It takes about 5 hours, from seeing the annual reminder in my calendar to having filed my tax return, i.e. one Saturday morning. 

Skip to the instructions I use to file my tax return.

The attitude you need to pay your taxes calmly

The attitude that makes filing your tax return easy is a learning mindset. 🧐 Many people have fixed mindsets. It’s not possible to calmly file your tax return if you’re not open to learning. 

Every year, there’ll be something a little bit different about how you need to file your taxes. 

• Your income might have changed
• You might have earned some income from somewhere new
• The IRD’s website might have moved a button to a different place or changed some language
• The investment platform you use may have changed some of their instruction around how to pay tax on your investments
• The law itself may have changed

The only thing we can control is our attitude.

Instead of being annoyed when you have to pay more tax, get excited! As a general rule of thumb, the more tax you need to pay, the better off you are financially. Instead of playing small, step into a new mindset of abundance and own your success. When I moved into a new tax bracket a few years ago, I took my partner out for dinner and we celebrated. 🥳

One way I like to cultivate a positive outlook is to imagine the tax brackets as levels in a video game:

I look forward to the final boss of the 39% tax bracket in coming years.

I don’t believe in trying to get all creative with tax. My goal is simplicity. Some people spend their whole lives trying to pay less tax. What a waste of mental energy and time. There are more important things, so keep it simple. Find out how much tax you need to pay, pay it, then get on with your life!

Principles of filing your tax return calmly

Whichever country you live in and whether you work with an accountant, an app, or do it yourself, here are the core principles that apply to filing your tax return calmly.

Preparation:

1. Write down your gross income and who paid you. I do this in a Word doc on the first day of every month.
2. If you have a business, write down any business expenses. In New Zealand, to be able to claim a business expense over $50, you need a receipt and you need to keep it for 7 years. I keep each years’ receipts in a file on my computer. If I get a physical receipt, I take a picture with my phone and add it to this file. I enter these expenses into a spreadsheet twice a year (once in Nov and once in May, immediately before I file my return). I call this my Finances spreadsheet. It contains all my self-employed income, expenses and home office info, making it really easy when it comes to filing my IR3. Click here to make a copy of the exact Finances spreadsheet I use. Keep what is relevant to your situation and delete the rest. 
3. If you made any charitable donations in the previous tax year, locate your donation tax receipts. If you live in New Zealand, here’s how to upload your donation tax receipts.
4. Have a pot of money (a sinking fund) set aside for unexpected tax obligations. When you file your tax return, sometimes you get a refund, sometimes you owe money. When the latter happens, having a pot of money set aside makes this experience one of calm, instead of one of panic. Depending on how my investments perform, sometimes I need to pay more tax. The way I deal with this is I have a checking account on my internet banking called Tax. I have a weekly automation that sends $35 to this Tax account, from the account I get paid into. If I owe money at the end of the tax year, I have $1820 sitting there, ready to be deployed.
5. When you do anything related to filing your tax return, start writing down what you do as you do it. Then, next year, try following the instructions you’ve written for yourself. Tweak, tweak, tweak and pretty soon you have built an instruction manual that you can follow in your sleep. Click here to see the instructions I use.
6. Keep your investments simple. If you invest in fifty different stocks, trade crypto [3] or get involved in other complex investment vehicles, you’re going to be overwhelmed come tax time and you’re probably going to need an accountant to help you manage the complexities of your tax return.

Timing: 

1. Know what date you need to file your tax return by. Here in New Zealand, that date is July 7.
2. Wait until the tax office has all your reportable income details, before filing your return. In New Zealand, the IRD has started sending a helpful email in early April, telling people to wait until June before filing their return. Along with checking that the IRD has all my reportable income in their system, I also make sure the various places I invest have emailed me my annual tax statement before I file my return. I use a little checklist that looks like:
   1. KiwiSaver tax statement
   2. InvestNow tax summary report
   3. Sharesies tax statement

Filing the tax return:

1. Log into myIR
2. Check the IRD has all my reportable income details and that they are correct
3. Make sure my Finances spreadsheet is up to date with all other income and claimable expenses
4. Submit my IR3 tax return.
   1. If I owe any money, pay the amount in full immediately, using the money from my tax sinking fund. The benefit of paying in full immediately is that it allows you to move on with your life!
   2. Save a copy of the return and (when it arrives) my notice of assessment.

Set recurring calendar reminders for key dates, including:

• Record gross income (monthly, on first day of each month)
• Update my Finances spreadsheet with all self-employed income and related expenses (bi-annual, in Nov and late May)
• Start filing tax return (annual, on May 24)

The principles I’ve outlined here are the result of 10 years of asking myself the question ‘what would this look like if it were easy?’ 🏖️

If I may hop onto my soap box for one moment, I would love to help more people with their tax returns, but if someone charges you to help you prepare your tax return, they need to be registered with Inland Revenue. And I’m not planning on registering with Inland Revenue!

So a blog post it is ☺ 

Extra resources

The instructions I use to file my tax return

Start preparing return: from late May
Prerequisites: I have tax summary reports from all the places I invest and all known sources of income—including any PIE income—has been reported to IRD and is showing on myIR.

1. Check the Word doc where I record my monthly gross income throughout the year is up to date.
2. Check my Income Tax income summary on myIR for the period of the tax year in question is accurate and matches my records.
   -To check this, in the section “Income tax”, click “Income summary”.
   -Select “Last income tax year”

Things to check:

1. Salary, wages, benefits and taxable pensions (tip: set date range on my payroll pay history and check off against this. Check by the month, because IRD lists payments randomly by the month)
2. Schedular payments (tip: check against my “Income tax” Word doc)
3. New Zealand interest received (tip: just check that it’s there or thereabouts – don’t need to go number by number. Note: KiwiBank will be under the PIE income section)
4. PIE income (tip: Compare against my KiwiSaver end of tax year statement)
5. New Zealand dividends received (InvestNow, Sharesies) (tip: check that these do not appear on myIR. Make a mental note that as per usual I will need to manually report these dividends when filing my tax return. (note to reader: fun fact – up until a couple of years ago, InvestNow used to automatically report my dividends to IRD, but they were always full of mistakes, so the IRD probably got fed up with people not bothering to fix these mistakes and so now individuals have to report dividends manually.)
   1. Go to Sharesies website to download my tax statement to be used later on. For InvestNow, go to their website and download their pre-prepared tax summary report from ‘My documents’. Use my Tax Summary Report from InvestNow to calculate how to declare these dividends. Both platforms will email me when these reports are ready.

3. Open and update ‘Finances – 2023-2024’ excel doc. See my notes on home office calculations.
   1. In my dropbox folder from the previous tax year, duplicate the following and move to the folder for the current tax year: “NZ dividends declared 202#-202# – Sierra Truong” and “Why I changed some of the numbers IRD auto-filled 202#-202# – Dean Watson”. Then, update these docs.
4. Log into myIR.
   1. In the top left section “I want to…” click “More”.
   2. Click “File a return”
   3. Click ‘File now’
5. File return! Download return and file a copy.

How to save the most money on tax

Here are the simplest ways I’ve found to save money on tax.

Tax hack	Amount you will save
File your own tax return	$100 to $2000 per year
Declare the Entrust Dividend, if you received it [4]	<$70 depending on your tax rate
Check that your salary was reported correctly to IRD by your employer	>$50 depending on how big the error was
If you earn any money from a side hustle or self-employed work and you do all or a portion of this work from home, make a claim for this as a business expense [5]	>$50 depending on how much you earned and the size of the area in your home dedicated to this work
Claim your donation tax credits	>$10 depending on how much you donated
If you can’t find the answer to a question online, call the IRD or email the platform you invest with. Everyone wants you to file your taxes correctly, so I’ve found all parties to be very helpful. When contacting the IRD, calling is best, otherwise you have to wait the 15 working days they ask you to wait for a reply to an email.	Depends on what you’re calling about!
Keep your investments simple	A lot of time!

Helpful links

The blog post I never wanted to write: Tax — by Ruth Henderson
The easiest way to file your donation tax credits from IRD — by Yours Truly
What the FIF? Foreign tax and how to pay it — by Ruth Henderson
The Grounded Circle Podcast: #10: How to file your tax return calmly — My partner Sierra and I discuss our experiences with filing our tax returns
Survive IRD — yes, this is a Facebook group that actually exists
Taxman — by The Beatles, because why not.

Next steps

Once you have a process for paying taxes calmly, the next and final step in this money series is to combine your finances so you and your partner can tackle the ups and downs of life as a unified team. This will be the topic of the next article in this Money Series. I’ll link to it here once it’s published.

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Notes

[1] Even if you reinvest the dividends, you still need to declare them on your tax return, since dividends are income. It depends on what you invested in as to whether your dividends will get automatically reported to the IRD. If your dividends were automatically reported to the IRD (as is the case if you invest in PIEs) you won’t have to manually declare these. To find out if your dividends get automatically reported to IRD, just log into myIR in late May, go to your Income Summary for the previous tax year and see if they’re there! If they’re not, you can also try sending the platform you invest with an email to double check that they didn’t report dividends to IRD. Platforms like Sharesies, InvestNow etc. will usually send you a tax summary report sometime around April/May which will make it clear whether or not you need to manually report your dividends to IRD.
[2] Read about the difference between an income tax assessment and an IR3 here.
[3] I purchased $50 worth of Bitcoin a year ago so I could understand cryptocurrency better. I need to pay tax on any profit I make when I sell or exchange my cryptoassets. If you own any cryptoassets, check out these two excellent articles How is Cryptocurrency taxed in NZ and Cryptocurrency and tax in NZ, which help walk you through your tax obligations.
[4] If you live in Auckland, in a particular area, you will receive The Entrust Dividend around September each year. It varies from year to year, but ends up being around $300. Depending on your tax rate, you may have paid too much tax on your dividend. I always declare my Entrust Dividend on my tax return so that the IRD can decide if I’m owed more money (I almost always am). As it says on the form itself, “If you are on a lower tax rate [than 33%] you may be entitled to a refund of the tax paid on this distribution if you file a tax return.” If you’re in the lowest tax bracket (you earn under $14,000), you would have paid 22.5% more tax on this dividend than you needed to! Even if you earn $70,000, you still paid 3% more tax than you needed to: if the dividend was $300, the IRD owes you nine bucks! If you declare the Entrust Dividend on your tax return, the IRD will refund you the difference. I declare this in the New Zealand Dividends section of my tax return and include an attachment of the Entrust Dividend form as a supporting document, so the IRD knows why I’m asking them for more money. Declaring the dividend looks like entering the correct amount onto my IR3 for ‘total gross dividends’, ‘total dividend RWT’ and ‘total dividend imputation credits’.
[5] The IRD has comprehensive articles on how to claim home office expenses.

Art by Sierra Truong

Thanks to Hamish Bulsara, Christine Chow and Cynthia Gao for reading drafts of this.

Also to Dave Cameron, Sierra Truong, Claire Twyman, Adam Walmsley and Pippa McCormack Wolf for reading a very early draft of this.

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Disclaimer: Like your all-knowing uncle telling you the latest stock tip, this should not be considered financial advice.