©iStockphoto.com/Courtney Keating Image by: ©iStockphoto.com/Courtney Keating
Here are five things to consider now that could help you lower your tax bill later.
1. Review your investmentsâ€¨
Most people know that investments held inside an RRSP or TFSA grow tax-free. But any investments held outside those places -- including your high-interest savings account -- are subject to tax. The amount of tax payable varies, depending on the investment, so it's wise to review your portfolio to make sure you're holding the right securities in the right type of account.
Bond payments, for instance, are taxed as income -- about 46 per cent if you're in the highest tax bracket in Ontario -- so it's best to hold them inside an RRSP. Dividends are taxed at a much lower rate, about 23 per cent in Ontario, so they're fine to hold in a nonregistered account.
2. Find tax breaks and claim what you canâ€¨
There are numerous deductions and credits people can claim, so brush up on what tax breaks are available. There's a Children's Fitness Tax Credit, for example, so if your kid is going to play baseball this year, make sure you keep the bill.
Sole proprietors can claim everything from office supplies to vehicles and travel, so, again, be aware of what you're spending and which bills should be stored safely in a shoebox.
3. Invest in your RRSPâ€¨
When you receive your tax refund this year, you should immediately put it into your RRSP. That's because every dollar you put into that account lowers the amount of income that's subject to tax. So not only will you end up owing the government less, but they'll once again send you a cheque.
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Talk to your bank about your RRSP: Also make this the year that you set up regular automatic contributions. Talk to your bank about automatic withdrawals -- even $50 a paycheque is a good place to start -- and think how far ahead you'll be next February.
4. Cut your taxes with income splitting
â€¨If you're a retiree receiving pension income, you can actually split 50 per cent of the eligible income with a spouse or partner. That means you, the pension earner, are allowed to claim just half the income. Your spouse can claim the other half. That way your tax bill is reduced, and while your spouse's may be a bit higher, no one's in the highest tax bracket. (This only works if one spouse is in a low tax bracket.) All of this is done right on the tax return, so there's no preparing in advance per se, but it's something that you need to remember to do.
5. Sell stockâ€¨
During the year, consider selling poorly performing stock. Every time you dump a stock that's fallen in value, you get what's called a capital loss. That loss is used to offset capital gains taxes, which you'll owe the government when you sell equity that's made money. The best thing about capital losses is that you can use them to counter gains made in the prior three years or you can carry them forward indefinitely. So even if you can't use the loss to offset any gains this year, it's still worth selling because you can use them down the road.
Most of us make the mistake of thinking about our income tax bill only in April, when we're preparing our taxes. But for the best results, we should really be thinking of ways to reduce our bill all year round.
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