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Moncton Times & Transcript ~ Tax Help Plus ~ Year End Tax Planning 2 ~ December 19, 2006 - 06 Jan 2007 by TaxHelp
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We’ll be into a new year before too long and last week we looked at some steps that could be taken to lower your taxable income that will reduce your bill next April. This week we are going to consider the deductions and credits that can be arranged that might allow you to keep a little more in your pocket when you file your taxes.
RRSPs continue to be the best way to reduce your current tax bill. Every deductible dollar invested lowers your total tax bill by 25 per cent at the lowest taxable levels. There are many types of investments that qualify for this purpose - deposit certificates, mutual funds and stocks are three. Now is a good time to invest if it's going to be registered, as prices generally go up closer to the RRSP deadline.
People who are married or in a common-law relationship are allowed to make contributions to their partner's RRSP and take the deduction for it, as a way of income splitting for the future. However, there is a law that attributes that income back to the contributor if it is withdrawn within three calendar years. By contributing before the end of this year, the period has been effectively lowered to two years and days, so your spouse can take the RRSP proceeds into his or her own hands after 2008. The practice effectively deals with the concept of last in - first out, so you cannot make another spousal contribution after this one, without suffering the attribution rules.
If you turned 69 this year, you have to convert your RRSPs into income by Dec. 31. If not, that money is fully taxable. On the other hand, if you have earned income in 2006, you will be able to contribute to your RRSP next year. Confused? Don't be. Although you can't have an RRSP next year, you can have a contribution and deduction. By making the contribution in December, you carry forward an unused deduction to 2007, incur a penalty tax of $160 (based on a one month over-contribution on $18,000), and get a write-off for spring 2008.
Any expenses that can be claimed against investment income have to be paid by the end of the year. These include interest on investment loans and accounting fees, so get out your cheque book and pay for that safety deposit box now. Likewise for any work related dues or professional membership fees.
People who require a vehicle as part of their job are allowed capital cost allowance (CCA or depreciation). If you routinely buy, instead of lease, now is the best time. Cars depreciate at 30 per cent per year. However, in the year you buy, you can only take half of that. Therefore, it's better to have the asset and use it for a couple of weeks, while effectively getting six months of CCA, than to wait until January to purchase, have it 12 months and have the limited depreciation. Remember, you must take delivery of the asset by year-end. If you lease, January is the time to act.
A tax credit is different from a deduction. Generally, deductions are better because they lower your taxable income dollar for dollar, whereas a credit gets applied to the tax bill, based on certain percentages. Most credits are non-refundable. This means that they can be used to reduce your bill, but not generate a refund. Medical expenses are probably the most common non-refundable credit you control. In order to claim medical expenses, only amounts over a 3 per cent income threshold may be used (with a maximum expense reduction of $1,844).
As an example, $20,000 of income gets to claim medical expenses over $600. Now is the time to finish paying off the orthodontist or buying the glasses to generally increase your total. Medical expenses can be grouped into any 12-month period, as long as the latest expense ends in the tax year.
We can also help ourselves to increased tax credits while helping the less fortunate. You may wish to give the less fortunate a hand by going beyond the local turkey drive and by writing a cheque to a worthy charity like Headstart or the Salvation Army for a more substantial donation. A combined federal/provincial tax credit of 25 per cent is generated on the first $200 of charitable giving, and almost 47 per cent on the balance. On a $400 donation, the first $200 generates an additional refund of $50 while the next $200 generates $93 in total tax savings.
As we move to the year-end keep these tips in mind. With the holidays upon us, we'll all have more than enough bills in the spring.
On a separate note it's that time of year again when we offer a service to various garden clubs, lunch-and-learn employee sessions, business meetings and association functions where we discuss the newest tax changes. These events usually run somewhere around an hour once a question-and-answer is completed and are offered both during the day and evening. Most important, there is no charge for this service. If you or someone you know has responsibility for meeting planning at your work or social club, and would like us to come out and have a chat early in the new year, please contact the office to arrange a time and give us some details so we can tailor it to your specific organization.
Roger Haineault is with Help 4 Taxes. His column "Tax Help Plus ..." appears each Tuesday. For questions, comments or column suggestions he can be reached by calling 855-HELP (4357) or by emailing roger@help4taxes.ca
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