It’s tax season, and as you’re scrambling to get your taxes done on time, you might want to take some hints from the wealthy about how to minimize what you owe. A new CBC article details just what you can learn from those with higher incomes, and it is apparently all about thinking long-term rather than short-term. I wonder if Donald Trump follows these rules…
A refund is…bad? What?
I’m not rich – and I’m not a tax pro by any means – so this is really surprising. Like most Canadians, I love it when I can score a big tax refund (which hasn’t happened in a couple of years!). But according to Laura Wallace, vice-president and portfolio manager at Scotia Asset Management, refunds are bad news. I know, I was confused too.
A refund means that you paid too much on tax during the year, and that you lost out on the interest that you could have made had this money gone into the bank (instead of you paying too much in taxes all year long). Often times, a refund is the result of someone not asking for the appropriate payroll deductions.
“Many of those, in particular in Manitoba and in Ontario, are credits that will come to you later throughout the year,” Wallace said. “If you don’t file your tax return, you’re not going to get those credits, and you’re going to need those for your family, especially if you’re in a low-income bracket.”
I would imagine that it would be very easy to miss certain deductions when preparing your own taxes. I’ve never done my own taxes for this reason, to be honest. I have a lot of write-offs (thank you, self-employment), education-related costs and deductions (I’m in the process of getting my PhD), and income from employment in a foreign country. My taxes are not exactly simple right now, but even when they were, I relied on an account in my family.
I don’t want to miss crucial deductions that will save me money in the long run. I’m assuming most Canadians don’t want this either, and I think that there should be more education for the general public – and not just at tax time. I have a tax-free savings account, for example, but it took me a very long time to understand how to best use it to my advantage. Registered retirement savings plans are another tax deduction tool that too many Canadians still aren’t using.
Respond to major life changes – like getting knocked up, for example
Did you recently have a baby? Congrats – I hope you claimed your new dependent. The CBC article mentions that people should be taking advantage of registered educational savings plans, and I encourage you to do so. I’m sure that you don’t want your kid to be nearing 30 and deep in educational debt, like many in my generation, including myself.
Having elderly parents and/or a wide gap between spousal incomes also has tax implications. Each of these things can help you lessen your owed amount, provided you check the appropriate boxes and provide the necessary information. Not even a $5,000 tax deduction could convince me to let my mom move in. Sorry, mom. But if you have an elderly dependent, you certainly do want to let the government know.
Spouses with vastly different incomes can also get tax breaks. One spouse can loan the other one money and assets at a CRA-set interest rate. The income will then be taxed in the lower spouses’ income bracket. So, all you single wealthy men and women should start seeking out poor (relative to you) partners for income tax purposes. I volunteer myself for any millionaire. I don’t cook or clean or iron, but I clean up nicely and I’m a killer cuddler.
Paying down debt is also important (duh)
Well, this tip is pretty obvious. Wallace says that everything shouldn’t be about tax deductions.
Paying down credit cards is crucial, she says. Thank you, Captain Obvious. I guess it can’t hurt to have a reminder about this, but I’m pretty sure most of us would prioritize paying off our credit if we truly could. (Or maybe I’m bitter because I just booked a ton of dates in a hotel and my credit card is maxed out.)
“You know what interest you’re paying and you know you’re going to pay less,” she said. “You need to look at your total financial picture and not just at tax-minimization strategies.”
Beyond credit cards, paying down your mortgage is an obvious priority that shouldn’t be ignored. The same goes for car loans, lines of credit, or any other bank-sponsored debt. Find the applicable tax deductions, but pay attention to your pressing financial concerns. Rich or poor, that sounds about right to me.