Most people either don’t do any advanced planning or they wait until the last minute to try and do something about reducing their taxes. Advanced tax planning is the process of projecting your tax liability ahead of time, and reviewing your situation to uncover tax minimization strategies that can reduce your current or future tax liabilities.
By planning ahead and being proactive, you open a plethora of options to reduce your taxes. Many options are not available to you when the time comes to actually file your tax returns. So the 3 Reasons You Should Prioritize Tax Planning are as follows:
TAX TIP Your TFSA is much more flexible than your RRSP because your contribution room is not lost when you withdraw funds from it unlike your RRSP. However, assuming that you are in a high tax bracket, we recommend investing in a TFSA only after making the maximum contribution to your RRSP which gives you an immediate tax break because it can be deducted from your income. Please contact us now for questions and advice concerning a TFSA account.
- To Pay Less Tax, of Course!
Okay… the most important reason you should prioritize tax planning is pretty obvious – so you can pay less overall tax!
Reducing your tax in the current year or in future years can be accomplished with some planning. Most people benefit from tax planning, but it is especially important if any of these situations apply to you:
- You are self-employed or a business owner.
- You have investments with significant unrealized gains or losses.
- You have had a major life-changing event during the year, like selling a home, marriage or divorce, if you’ve retired or had a child.
- If you’ve had a dramatic change in your income (up or down), or a change in jobs.
- If you have moved, especially between provinces.
- If you are sending a child to college or university for the first time.
- To Allow Enough Time to Implement Planning Ideas and Maximize their Benefits
While some tax planning strategies can be accomplished in short order at the last minute, most require much more time for proper analysis and implementation. For business owners, legally shifting income between individuals or companies takes months or longer.
We begin tax planning for our more complex clients in September or October of the preceding year. If you run a business or have a complicated tax scenario, we recommend that you start planning early enough to have the plan completed and in motion before the start of the holiday season.
- To Take Advantage of Annual Tax Law Changes
Every year, or at least nearly every year, the federal government changes the tax laws. Sometimes the changes are major, and sometimes the changes are minor. No matter the number or type of law changes, the result is that what’s true on December 31st of one year may not be true the next day.
The law changes make tax planning important so you are able to take advantage of the changes. Maybe you need to take action before a particular law expires. Or maybe you need to delay something until next year to benefit from a new law taking effect.
Being proactive gives you the ability to benefit from the changing environment. Ignoring the upcoming law changes may leave you saying, “If only I had called my CPA Chartered Accountant in November I could have saved thousands of dollars, had I known then what I know now.”
The more informed you are on expiring tax laws and potential new laws the more equipped you’ll be for tax planning.
TAX TIP A TFSA should definitely be considered as part of your overall saving strategy. However, you should not contribute to a TFSA if, for example, you have a group savings plan at work and there is a company matching contribution that you are not maximizing, or you are a conservative investor who will earn a low rate of return on your TFSA and you have a mortgage at a higher interest rate than your TFSA would likely earn, or you have minor children and expect to fund their post-secondary education, but haven’t maximized your Registered Education Savings Plan contributions. Please contact us now for advice on whether you should contribute to a TFSA.
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