Watch this short video on how CleveDoesMore celebrate Tax Freedom Day related to our article for this month.
Explore 5 Simple Tips To Help Your Tax Bill Shrink!
Many people dread tax time, and Angella was no exception. Despite her nursing degree and many years of financial independence, she still felt rather helpless when it came to filing and understanding taxes. So, she did what many people do — she worked all year long, dropped off her tax papers with an accountant when they arrived, and hoped for the best when all the numbers were finalized. She just assumed that taxes were what they were, and didn’t realize that there were strategies that she could be utilizing throughout the year to lower her tax bill.
Needless to say, after meeting with CleveDoesMore, she was quite excited to put a few smart tips into practice, and see more of her hard earned money stay where it belonged… with her!
Here are a few of those practical tax tips to consider implementing this year.
Tip # 1
Stormy debt blossoms into productive debt.
If you have a credit card or a line of credit balance and you are paying interest that does not qualify for tax deduction, you may be able to convert this debt into a productive debt.
Angella had a credit card balance of $5,000 and a savings account with $5,000. Every month, she would pay 19% interest on the credit card, while the savings account only paid her 0.05%. With her marginal tax rate at 45%, she was paying 45 cents in taxes on every dollar she made. At that rate, her tax bill added up a lot faster than the 19% she was paying on a credit card or the 0.05% she was earning on her savings.
To fix that, she used her savings to pay off the credit card. Then, she borrowed $5,000 and invested it into an easy and safe investment, like a Tax-Free Savings Account, which earned her 9% in interest. She was able to earn more interest on that investment than what a regular savings account paid, and she could write off the interest being paid on the loan, which earns her a higher tax return. Next year, she plans to use her tax return to pay down the loan. Simple, right?
Tip # 2
Self-employed? Lower your pay and bask in the sunshine of lower personal taxes.
Did you know that the average Canadian pays about 45% on personal taxes, while corporations only pay about 20%? Although Angella worked full time for an employer, she also had a few side contracts that provided her some self-employment as well, so she began making that work for her.
Angella had been paying herself $25,000 a year from side contracting, but really only needed about $10,000 a year for personal expenses. By reducing her pay to $10,000 a year, she didn’t have to change her lifestyle, but she could watch her personal tax bill drop. Her business now only pays 20% on the $15,000 that she left in the business coffers. In the end, this leaves more money in her pocket instead of wasting it on taxes.
Tip # 3
The early CRA T1213 Form gets the lower tax bill.
Angella also was pleased to learn about the CRA T1213 Form, Reduction in Tax Deducted at Source, that she could use to apply for a lower tax deduction on her pay cheque. While there are specific qualifications to meet, such as higher child care and health care costs, high contribution to a Registered Retirement Savings Plan (RRSP), or if you normally get the foreign tax credit, it may be worth consulting a professional to get more definitive details on qualifying.
After all, this is not a tip you’ll likely get from Canada Revenue Agency (CRA) or your employer. Why would they tell you this option is available when it’s in their best interest to deduct as much as possible and as early as possible? When you complete your tax return, ask your accountant or tax preparer if you meet the T1213 requirements to lower your at-source deduction like Angella did.
Tip # 4
If your family sprouted, it’s time to review your at-source deductions.
The first $13,000 you make in Canada is tax free. If your spouse has no income, like Angella’s, you could get another $13,000 tax free. And, by the way, if you have a business and pay your child to work for you, you can get another $13,000 tax free!
The name of the game when it comes to taxes is to lower your taxable income and, ultimately, your marginal tax rate. Income distribution helps you achieve this goal, but you must seek careful professional advice to ensure these moves are suitable for your specific situation. Don’t do it just because it sounds good. Make sure you can objectively substantiate your claim.
Every now and then check with your company’s Human Resources or Payroll department to ensure your TD1 reflects your situation. If you’ve worked for the same company for a few years, your circumstances may have changed. Did you update your employer, for example, when you got married or had your first child? If you didn’t, then the company is deducting more taxes than necessary. Never give your hard-earned money to the government to hold when you could be investing it and putting it to work for you.
Tip # 5
Transform your mortgage interest and watch a new tax deduction be born.
This last tip is definitely one Angella wasn’t aware of and one the taxman doesn’t want you to know about either.
So what’s the big secret? It’s known as the Smith-Maneuver and here’s how it works. Mortgage expenses are one of the largest expenses Canadians face, but unfortunately we don’t get any tax benefits from this expenditure. You know the wealthy aren’t taking that kind of hit. Instead, they use the Smith-Maneuver.
In simple terms, this calls for converting the equity into your home into a line of credit. Talk to an expert and use the money to make wise investments and start earning interest. Finally, the interest you pay on that line of credit is tax deductible, reducing your tax burden. Wash, rinse, and repeat this process whenever your equity increases.
Before you execute this maneuver, though, talk to an expert. There are inherent risks that you must understand before you try this one.
At CleveDoesMore, the best part of our job is helping people make informed choices to strategize their risk and build wealth.
If you want to talk more about any of these tips, then contact CleveDoesMore today.
Whether you are planning to buy a home, want to learn more about budgeting & taxes, or are simply interested in obtaining guidance on investing and other financial matters, the CleveDoesMore team has the tools, resources, insights, and accountability you need to succeed.