Are you paying too much tax throughout the year? If you’re getting a tax refund, you might be doing just that. But don’t worry, there are easy ways to fix the situation.
When it comes to tax time, everybody wants to get a refund and feel the joy of depositing a cheque into their account (or getting a direct deposit). Nobody wants to pay more tax at this time of year. So why in the world would getting a tax refund be considered a bad thing?
Getting a tax refund could potentially mean that you are paying too much taxes throughout the year. The funds are then left with CRA rather than in your pocket to use as you wish. Think of everything you can do with that money throughout the year — which can make (or save) you more money.
Here are six practical ways that you can maximize your money throughout the year instead of aiming for a bigger refund at tax time.
1. Contribute to a TFSA
Instead of paying extra tax throughout the year, you could be putting that money into a Tax-Free Savings Account. The growth and earnings from that TFSA are 100% tax-free, so there are big advantages. You are allowed to contribute $5,500 for 2018, and if you have never contributed then you likely have a lifetime maximum of $57,500 since 2009. That is a large sum of money that can be working for you without having to pay taxes, and used for those unexpected expenses that can crop up.
Related: 6 reasons why you would open a TFSA
2. Pay down your debts
Review all of your debt obligations and look at tackling your highest interest debt first. Credit card debt is usually a good starting point, as the interest rates can be very high. For example, a $5,000 credit card balance at 18% compounded monthly will cost you $978 per year. By paying down even a portion of these debts, you’ll save money on interest charges and increase your monthly cash flow.
3. Consider expert advice from your investment professional or accountant
An accountant can review your specific situation and provide recommendations on what you can do to reduce the amount you pay during the year. Since they’ll have a good picture of your revenue and tax situation, they can help assess whether you’re paying too much tax throughout the year. Likewise, your investment advisor can tell you whether investing or paying down certain debts would be the wisest course of action at the time. It may be worthwhile to set up a meeting to get their expert guidance.
4. Jump-start next year’s RRSP
Contributing early allows you to take advantage of all those extra months of tax-free growth. And if you have regular cash on hand, you can easily channel those funds into your RRSP by setting up a monthly Pre-Authorized Contribution (PAC) Plan. It might not seem like as much right now, but at retirement this can mean thousands more in your pocket to enjoy.
5. Pay down your mortgage
Making additional payments on your mortgage is often a good option when extra cash flow is on hand. Lump sum payments on your outstanding mortgage principal (your outstanding balance) will save significant dollars in interest charges over the long-term. It also means you’ll own your home mortgage-free that much sooner. Speak with your mortgage advisor who can help make sure that your extra payments will be correctly applied to your loan.
6. Contribute to a child’s education
Instead of paying extra tax throughout the year, you can save towards future education for a child in your family. Even better, by adding funds to a Registered Education Savings Plan (RESP) on behalf of a child or grandchild, the federal government will also kick in a 20% bonus to the plan, to a maximum of $500 every year. Like your RRSPs, you can also set up a monthly Pre-Authorized Contribution to ensure that this education nest egg continues to grow.
Remember that it’s never too late to start on any of these tips, even when it’s close to tax time. Regardless of your tax situation, it is important to seek out the assistance of a professional to address your personal circumstance.
For more information on how Credential Securities and Assiniboine Credit Union can help you achieve your financial goals, feel free to reach out and we’ll be happy to assist.
The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.