Every year you work extremely hard with the intention to make more money so you can spend on what you desire. You put in more and more hours and seem to have less and less at after all the bills are paid. The problem is the more money that you make, the further the government gets their hand further into your cookie jar by taking more and more in taxes! There are quite a few effective strategies to reduce your taxes payable so you have more money for yourself, your family and your investments. Here are a few basic rules that you need to follow to make sure you get the most out of each pay cheque:
1. Contribute, contribute and contribute….RRSP’s
Attempt to maximize your RRSP contributions each year. This will reduce your taxable income and thereby reduce the amount of tax you have to pay. For example, if you earn $100,000 in the year and you contribute $20,000 to your RRSPs, you will save approximately $8,682 in tax.
Another benefit of RRSP’s is that if you do not own a property as your principle residence, then each spouse can withdraw $25,000 each from their respective RRSPs to purchase a home. This means that you and your spouse can reduce your income by $25,000 each over a few years and then use these funds to purchase a home without incurring any penalties.
2. The entrepreneur in you!
We all have dreams of starting our own business or working with our friends on a great new business idea. Expenses related to business are deductible on a statement of business income on your personal income tax return. Therefore, if you earned $90,000 and incurred $5,000 to start- up your new venture in the year, you will only be taxed on the net amount of $85,000 (thereby reducing your taxes by approximately $2,170).
3. Use your car to travel for work sometimes or work from the house often?
If so, then you should be able to deduct amounts relating to your car expenses or home office. The specifics of how much you can deduct are for another day, but the amounts can be substantial if you are regularly required to use these in your day-to-day work. You can ask your employer to sign a Form T2200 for you which verifies that you are required to utilize your car for work purposes or have to frequently work from home.
4. Deductible mortgage interest?
While you can’t actually deduct the interest from your mortgage unless you are claiming home office expenses, you can deduct interest paid to earn investment income. If you take out a loan and purchase investments with these funds, you can deduct the interest against any income earned. This is a great tax savings strategy if you pay down your mortgage as fast as possible and then take out a loan against your home to invest with. Rather than paying down your mortgage slowly and using any remaining funds to invest with, this strategy is an effective way to invest using borrowed funds. The goal here is to maximize your tax deductions and convert your mortgage into debt where the interest paid is tax deductible on your personal income tax returns.
5. Deduct Accounting/Tax consulting fees
Make sure to deduct accounting and tax consulting fees incurred in the preparation of your personal income tax returns. Although you may have to initially incur costs for the professional help, the deduction on your return along with the tax savings strategies implemented by your advisor will allow you to easily recoup your expenditures. It is better to pay a few dollars now to save a bundle in a few months.
When applied, these tips will help you pay less tax on your employment income. Nonetheless, be sure to consult a tax professional before implementing any of these strategies. As chartered accountants in Toronto and Mississauga drop us a line or send us an email (email@example.com) and we will be happy to answer all your questions.