You’ve probably noticed all the white envelops arriving in the mail recently. Sorry to remind you, but it’s tax time again. (Ugh!)
I suspect some of you have already started organizing your tax information. (If this is you, congratulations on your fantastic organizational skills!) But the vast majority of us still pile our tax slips into an ugly mess, with the hope that tax season skips a year.
Regardless of which group you belong to, it’s important to realize that a little tax planning is definitely worth the effort.
This is especially true for pharmacists. Pharmacist salaries are near the top of the tax-brackets, so a good tax plan can potentially save you thousands of dollars each year!
For those of you convinced that tax season comes EVERY year, here are a few tips to help you build a strong tax plan that will save you some serious money.
Tax Planning Basics
First, let’s cover some basics. Most strategies fall into two categories: tax deferral or tax splitting strategies. A third category called tax evasion is illegal, so we won’t cover it here. (Nobody likes jail, right?)
A tax deferral strategy pushes taxes you owe today into sometime in the future. Keep in mind, a deferral means you might eliminate a tax now, but you eventually have to pay it down the road.
So what’s the point of delaying a tax? Tax deferral strategies have two benefits: (1) Financially speaking, it’s better to pay a dollar of tax tomorrow than it is to pay it today (all things being equal) and; (2) The strategy gives you more control as to when you pay the tax. Examples of tax deferrals are RRSP and RESP accounts.
On the other hand, tax splitting (also known as income splitting) involves spreading income among one or more different tax payers.
The benefit to income splitting is that someone in a high income tax-bracket can save money if they transfer some of their income to a family member in a low tax-bracket. There are, however, several restrictions governing the use of income splitting.
The last thing you need to know is the difference between tax deductions and tax credits. Tax deductions reduce your taxable income. The higher the tax-bracket you are in, the more valuable the tax deduction.
By contrast, a tax credit is a dollar reduction in the amount of tax you owe. Think of it as a $100 off coupon on your next tax bill. Each taxpayer receives the same tax relief with a tax credit, regardless their tax-bracket (provided the credit can be used).
Lots of tax changes coming. Lots of confusion.
Recently, there’s been a lot of talk about tax changes in Canada. Some tax changes have already become law, while others are still just campaign promises from the new Liberal majority government. Figuring out what’s new for 2015 has been somewhat confusing.
Think of a tax credit as a $100 off coupon on your next tax bill.
Here’s the deal: It’s expected that most, if not all of the tax changes promised by the Liberals will come into law after the upcoming federal budget is announced. Many sources say the Liberals will unveil its first budget in the week of March 21. It’s also expected that most of the new tax laws will apply to the 2016 tax season.
So What’s New for the 2015 Tax Season?
Here is a summary of the tax changes that have already taken place. As you can see, most of the changes are directed at families with young children:
• Children’s fitness amount – This tax credit ($1,000 per child under 16) is now refundable. That means the credit ($1,000 × the federal rate of 15% = $150) can lower your taxes owed below zero, creating a tax refund. The change is not a huge win for pharmacists, but it still reduces your tax bill by $150.
• Child care expenses – The maximum limit per child has increased by $1,000
• Family caregiver amount – The amount for children under 18 years of age has been eliminated and replaced by the enhanced universal child care benefit.
• Family tax cut – For 2014 and later years, the calculation for the family tax cut has been revised to allow unused tuition, education, and textbook amounts transferred from a spouse or common-law partner.
• New and Improved Filing Services – The Canada Revenue Agency (CRA) has enhanced some of its online services. Electronic filing was improved, and a new mobile apps makes it easier to see and change some of your tax information.
The Key to a Good Tax Plan
The confusion around all the new tax rules illustrates why it’s important to have a good tax plan. The key is to create a plan with a multi-year view.
Many tax strategies will have an offsetting effect at some time in the future, perhaps even the next year. For example, a deduction used this year is a deduction that’s not available next year — when maybe a higher tax rate would make that item more valuable.
Some tax-filing software programs now offer tools that allow you to compare different tax decisions and their impact on your return. But if doing your own taxes is not your thing, a good tax professional is probably worth the money.
A final note: It’s truly in your best interests to coordinate your investment plan with your tax plan. As mentioned, a good tax strategy should have a multi-year view. In many cases, an investment decision will have a ripple effect that impacts your tax return.
We’ll keep you updated when the next round of tax changes are officially implemented. Stay tuned.
