Making The Most Of Tax Time
I have mixed feelings about income tax time.
On one hand, I hate the actual process of preparing my return, gathering & inputting the data and making sure its right. On the other hand, I love the opportunity to plan my tax strategy for future years. Call me crazy, but I get lots of satisfaction just thinking about ways to keep more of my money rather than giving it to the government. So, this is where I spend most of my time (once my tax return is sent off to the CRA). I’m hoping you do as well?!
A couple examples to help you understand what I’m talking about…
If you’re a student, preparing your tax return can give you access to government tax credits (i.e. “free money”), future RRSP room or a refund of tax paid from a summer job. If you’re a parent, you may get a refund resulting from your RRSP contribution, transfer of student deductions from your kids or child care expenses. If you are planning for retirement, there are ways to structure your future income to reduce your taxes, especially if you have a spouse.
For my husband and I, one of the most important concepts is planning how to maximize our combined after tax income both now and in the future. We love to travel so every extra dollar we keep is a dollar we can use for travel. We also focus on the long term i.e. our potential “lifetime” tax bill, not simply our current tax bill. Sometimes, it can make sense to pay a bit more tax today if it means much less tax in the future. For example, do you know that a Canadian retiree, whose only source of income is eligible dividends, can earn more than $47,000 without paying any tax?
Even young adults should think about tax smart ways to save money. It’s tough to save when you’re just starting out, but here’s an interesting example to consider. If an eighteen year old saves $5,500 per year in a tax free savings account, he will have over $1,000,000 by the time he’s 65 years old (assumes 5% interest earned per year). And, he will pay zero tax on this money whenever he chooses to withdraw it. Not a bad retirement nest egg!
Its never too early or late to begin thinking about your income tax strategy. And, get help from a knowledgeable source if you need it… the payoff could be better than expected!