Saturday, 2 January 2016

Top 5 ways to maximizing your finances and minimize your tax burden for 2016


As we begin a new year, here are my top 5 ways to maximize your finances and minimize your tax situation.  After all, this blog was created for these 2 top reasons, if these 2 reasons are realized, you generally feel better with yourself and this in turns reduces those sleepless nights.

1.  If you have it, contribute $5,500 to your 2016 TFSA as soon the calendar changes to January 1st.  You will have the entire amount working for 12 months as opposed to putting in small amounts.  Last years limit of $10,000 is still available if you have not contributed to your 2015 limit.  Previous years are also still there.  Once again, this is a self directed TFSA, no savings accounts, no mutual funds.  You pick the dividend stocks.  

2.  If you expect to be in a lower tax bracket when you retire (which a lot of us will be).  Consider contributions to your RRSP.  While much of the focus in the next 60 days leading up to the contribution deadline of Feb 29, 2016.  Why not consider contributing to your 2016 RRSP.  Exact same reason as in number 1 above for contributing early.  Again, this is a self directed account.

3. If you got kids under 18, be sure to contribute at least $2,500 to each child's registered education savings plan (RESP) to take advantage of the 20% matching from the government.  You may be able to catch up from previous years.  Again, a lot of people maybe unaware, RESP accounts can be self directed, I would prefer it to be.  Who wants to pay fees for the first 18 years of a child's life when you should be saving for the first 18 years.

4. While income splitting for families, known formally as the Family Tax Cut, was eliminated for 2016, you may still be able to do some income splitting by taking advantage of the historically low prescribed rate.  If you have a spouse, partner, or kids in a lower tax bracket than you, consider a prescribed rate loan strategy whereby the higer-income spouse or partner loans funds to the lower income spouse or partner to invest at the record low prescribed rate, which is at one per cent until at least March 31.  Here is the CRA website link http://www.cra-arc.gc.ca/tx/fq/ntrst_rts/menu-eng.html

5.  Plan now to avoid a tax refund next spring.  If you regularly get a large tax refund each spring, consider applying for a reduction of tax at source use the CRA form T1213.  This form needs to be updated annually.  Getting a large tax refund sounds good but in reality, you are hurting yourself, you are giving the government an interest free loan for 12 months.  If you use the reduction at source, your refund will be split evenly by the number of times you get paid by your employer which will increase your take home pay a little.  That is basically what your large tax refund is, all those little amounts of additional take home pay added into one amount.

Hope some of these ideas generate conversation or ideas for you.

Happy New year.