Year End Tax Planning Strategies for Personal Tax Returns
As the new tax year 2017 is fast approaching – it is very important to plan ahead of time to save taxes on your 2016 personal tax return. The deadline for personal tax filing is April 30, 2017 – but are you aware of the year –end deadlines to receive certain tax credits and deductions. We will discuss below certain transactions you need to do before the end of the year for you to claim those tax benefits on your 2016 personal income tax return.
Tax Loss Selling
Do you own property like stocks, bonds, mutual funds, real estate etc. in non-registered investment accounts that have declined in value? In a non-registered account, when you a sell a security that has declined in value, you realize a capital loss. You can use these to offset any capital gains you have incurred in the current year, which can reduce your tax bill. Moreover, unused losses can be carried back up to three years to get a tax refund, or carried forward indefinitely to offset future capital gains.
Tip: Take the time to review your portfolio before the end of the year. You may want to consider selling them before the end of the year i.e., by last week of December, to realize the capital loss to shelter other gains you have had during the year.
Contribute to your RRSP
Contribute to your RRSP up until age 71 as the contributions are tax deductible. Tax deductible means that the contributions to the RRSP will be deducted from your gross income resulting in lower taxable income or tax refund. The RRSP deduction and contribution limit is 18 percent of your earned income to a maximum value each year. The maximum RRSP contribution limit for 2016 is $25,370. Unused contributions are carried forward each year, so if you didn't maximize your RRSPs last year, you can add the unused amount to this year's limit. The deadline to contribute to RRSP is Feb 28th / 2017 for the contribution to count towards the year 2016 tax return. You can find your contribution limit on 2015 Notice of Assessment or by calling CRA at 1-800-959-8281.
Contribute to Spousal RRSP
Contribution to spousal RRSP by the high-earning spouse to the lower earning spouse’s RRSP allows the high-earning individual to claim the deduction themselves resulting in lower tax payable. When it comes time to withdraw the funds from the RRSP, the money is taxed in the hands of the spouse, as long as the contribution has remained in the plan for at least two calendar years after the year in which it was first deposited. If the contribution is withdrawn before the end of two years, then the spouse who contributed has to include the amount in his income and pay tax on it. Therefore, setting up a spousal RRSP can be a good idea if your spouse or common-law partner is likely to be in a lower tax bracket than you at retirement as it is a great income splitting strategy.
Charitable Donations Tax Credit
Make a contribution to registered charitable donations and qualify for the federal credit of 15% on the first $200 of donations made and 29% of the amount in excess of $200 claimed as donations during the year. Make sure to keep the receipts for donations in order to claim the amount. There is an additional federal credit called first time donor super credit of 25% on the amount up to $1000 in donations. This one-time credit may only be claimed once in the 2013 to 2017 taxation years. You are considered a “first-time donor” if neither you nor your spouse claimed a charitable donation tax credit in any of the five previous years.
For example, if a couple hasn’t donated in the last 5 years and donates $600 in 2016 tax year. The Donations Tax credit will be: (200 x 15%) + (400 x 29%) + (600 x 25%) = $ 296.
Tax Tip: If the donation is more than $200 during the year, then one spouse should claim all of the donations in order to maximize the credit.
If you are self-employed sole proprietor or partnership, then have your business pay a reasonable amount of salary to the lower income spouse / common law partner or children. This is a great income splitting strategy to reduce your year-end tax bill as long as the salaries paid to family members are reasonable as per their job duties.
Contact Bajwa CPA Professional Corporation today to discuss your current investments and savings strategies that may benefit your tax filing. You can also take a look at the list of our accounting services that we provide to businesses and individuals