It’s only October and tax season is still a couple months away but now is the time to start thinking about options to reduce your overall tax bill. I get amped up just thinking about the opportunities to do some simple tax planning (I don’t get out much…)The objective of any taxpayer should be to pay the correct amount of tax and not a dollar more. This means taking advantage of every deduction and credit offered by the Income Tax Act as well as structuring your personal and family finances in an efficient manner.
Contributing to your RRSP is one of the best ways to reduce your tax burden this year. The CRA will not charge any tax on contributions made, however, they will hit you up down the road in the year you withdrawal from your RRSP.
The key to maximizing your RRSP contributions to reduce your overall tax bill is planning when to make contributions as well as when you will likely be making withdrawals. To sum up the most tax effective approach: Make contributions to your RRSP in the years you earn the most and withdrawal from your RRSP in the years that you earn the least.
Contributions to your RRSP reduce your marginal taxes, so someone who is taxed at a higher rate (a high income earner) will receive a greater tax relief benefit than a lower taxpayer.
The same logic is used when withdrawing from your RRSP. Once you retire your income will likely decrease allowing you to withdraw from your RRSP at a lower tax rate.
The RRSP basically works as a tax deferral plan. Your goal should be to defer taxes by contributing to your RRSP while your rate is high (during your employment years) so you can withdrawal those funds at a later date when your tax rate is lower (during your retirement years).
Unsure whether to contribute to your TFSA or RRSP first? Check out this earlier article to make the most of your savings this year.
Kids are pricey. There have been multiple studies on the true cost of raising a child, most of which don’t include the mental anguish. However, relief has been offered by the rarest of places – the CRA!
Similar to the above discussed RRSP deduction, the tax act allows families to deduct child care expenses. These expenses include day-care centres and day nursery schools, day camps and day sports schools, educational institutions such as private schools (the portion of tuition costs relating to child care services), boarding schools, and overnight sports schools and camps. Limits for deductions per child are as follows:
I discussed the big time benefits of the RESP in an earlier post. The government will match contributions by 20% up to $500-$600 (depending on your family net income). Again, this is free money, so make sure you take advantage.
Via the children’s fitness and arts tax credit you can receive some money back for amounts spent on your extra-curricular activities. If you enroll your child in sports, fitness, or arts program you could save up to $125 if you spend $500 or more on the programs.
Medical tax credits are typically the most overlooked area on a tax return. If you have paid out of pocket medical or dental expenses you are eligible for a tax credit. Here’s the formula to determine the tax credit for someone with a net income of $50,000 and $5,000 in medical expenses in 2014:
Eligible Medical Expenses $5,000
Minus the lessor of:
a) 3% of net income ($50,000 x 3%) ($1,500)
Eligible Tax Credit $3,500
The above tax credit of $3,500 would likely result in a tax benefit of $700. The medical expenses are reduced by the lessor of 3% of net income and $2,171to give those that earn less a great benefit. Therefore, the spouse the earns the least but still tax liabilities should claim the medical expenses.
This reason this credit is often overlooked is taxpayers don’t realize that certain treatments qualify. I’ve put a brief summary of treatments that qualify at the end of this post.
If you have tossed your receipts from your dentist or doctor, call up their secretaries and asked for an annual statements. This will suffice as evidence for costs incurred.
Donations are a great way to spend money. They give us the opportunity to provide for others which connects us to the world in which we live…aside from that mushy stuff they also give us money back on our taxes. A word of caution to ensure the recipient is a registered charity, otherwise your donation may be disallowed.
A taxpayer can claim up to 75% of their income on charitable donations in a year (100% in the year of death). For the purposes of determining the tax benefit the tax rate is applied on the first $200 and the highest tax rate is used thereafter. For this reason putting the donations on the higher income earner between spouses will provide the greater tax benefit. If all the donations cannot be used in a year they can be carried forward.
A BIG hint here to my family (although they’ll probably pretend they didn’t read this bit). If you have a simple return you likely can handle filing your own taxes. In fact, there are a few websites that allow you to file for free if your net income is below $30,000. As the tax season approaches I’ll list my top tax programs to help you figure out the best way to go.
If you have a more complex tax situation (non-registered investments, small business or rental unit income) it may be best to have a professional prepare your tax return. Often these services will save you more in the long run.
Eligible Medical Expenses for the Tax Credit
•services of dentists, nurses and other medical practitioners
•expenses not covered by health plan
•medical coverage for foreign travel
•certain transportation costs
•reasonable moving costs
•care of person with impairment
•artificial limbs/eyes, wheel chairs, hearing aids