When it comes to filing taxes, it is natural to wish for ways to lower the payables. However, without proper planning, it is not easy to save on your taxes. Nonetheless, this article should help you plan your taxes the right way. What to do before filing tax? Before you calculate your taxes, there are a few things that you should ensure.
In Canada, taxes are collected at both the federal and provincial levels. The federal government levies taxes through the Canada Revenue Agency (CRA), while the provinces and territories each have their own tax collection agency.
The Canadian income tax system is based on a progressive rate structure, which means that as your income increases, the percentage of taxes that you pay also increases. The federal tax rates for the 2022 tax year (the tax year for which the majority of people file their taxes in 2023) are as follows:
- 15% on the first $48,535 of taxable income
- 20.5% on the next $48,535 of taxable income (on the portion of taxable income over $48,535 up to $97,069)
- 26% on the next $53,404 of taxable income (on the portion of taxable income over $97,069 up to $150,473)
- 29% on the next $63,895 of taxable income (on the portion of taxable income over $150,473 up to $214,368)
- 33% of taxable income over $214,368
In addition to federal income tax, Canadian residents are also subject to provincial and territorial income tax. The rates and thresholds for provincial and territorial taxes vary, so it’s important to check the specific rules for the province or territory where you live.
In addition to income taxes, there are also other taxes that Canadians may be subject to, such as sales taxes, property taxes, and taxes on goods and services. It’s always recommended to consult a professional tax advisor or a lawyer to make sure your taxes are done correctly and you are taking advantage of all tax credits that you are eligible for.
Collecting The Necessary Documents
The first thing you ought to do is gather all the necessary documents before you file your taxes. These can include tax forms like W-2s or 1099s, acknowledgment receipts and invoices, and more.
The idea is to have all the necessary documents to support the tax deductions that you’re eligible for.
You may also need to collect other receipts, such as higher education expenses, to claim tax benefits for your dependents.
Also, keep your Form 1444 and 1444-B issued by IRS for your first and second stimulus payments. These forms should help you claim a recovery rebate for higher tax payments.
Access Your Previous Year’s Tax Information
Another piece of information that you should always keep handy is your previous year’s tax return.
Your previous year’s tax return should give you a good reference point to claim deductions. It should also help you with your Tax Planning to save more on your taxes this year. And not to mention, it would also provide you with a reference point to evaluate your financial growth this year.
Besides, it is also mandatory to provide your previous year’s gross income (after adjustments) for additional security purposes. It gives the IRS a firm reference to scrutinize the taxes that you’re paying for this year.
What to do during filing taxes?
Once you are done with your preliminary preparation, you’re good to file your taxes. However, there are still a few things that you should keep in mind to save on your taxes.
1. Above-the-line deductions
When filing your taxes, you need not pay for certain expenses. In other words, you can claim deductions for some expenses that you make as a business. These are often referred to as above-the-line deductions.
For example, the wages you pay to your employees, student loans, tuition expenses, and more can help you adjust your gross income. And with a lower gross income, you can easily save hundreds of dollars in taxes.
Student loan deductions can be made up to $2,500. Likewise, tuition expenses can be deducted as much as $250 in a year.
But, when calculating your deductibles, you need to make sure that you are eligible for them.
2. Calculate your most missed credits
To your surprise, there are a few credits that are not taxable. And many taxpayers tend to miss these credits year on year. As a result, they end up missing out on substantial tax savings.
For example, the earned income tax credit is one of the most commonly missed credit types. As per the IRS, one in every five taxpayers misses out on these tax savings every year.
Now, this is something that you should be vigilant about. It would be best to be sure that you are eligible for earned income tax credit or other similar credit benefits to save up your taxes.
3. Include tax benefits for your dependents
IRS allows certain tax benefits to taxpayers if they have dependents, for instance, aged parents or children.
For example, you can claim a child tax credit worth up to $2,000 if your children are below 17. In addition to this, if you pay for child care, you can further claim up to $1,050 for one kid and up to $2,100 if you have more than one kid.
Note that dependent benefits are not only limited to children and relatives. If you have a boyfriend or a girlfriend whom you support financially, you can claim up to $500 in tax credit.
All you need to do is collect the correct information, such as the social security number of your dependent, and you can attach it to your Form when filing taxes.
4. Maximize itemized deductions
Most of the taxpayers (about 90%) usually claim only the standard deductions. Instead of itemizing, taxpayers typically prefer to keep it simple.
Note that it can cost them as much as $12,400 for single taxpayers and $24,800 for married taxpayers. Now, that’s a lot of money that can be saved.
Itemizing your deductions, such as your home mortgage interest or property taxes, can help you save a lot in your taxes. Additionally, you can also include any charitable contributions that you make. These contributions can further reduce the taxes you pay.
5. Create a retirement wealth
The last thing that you can do to save your taxes is to contribute towards your IRA.
Retirement savings are a great way to reduce your taxable income. And therefore lower the taxes that you pay to the IRS.
You can contribute up to $6,000 (or $7,000 if you are 50 years or older) and can deduce it from your taxable income. You may also be eligible for additional savings credit for contributing towards our retirement funds.
What To Do After Filing Taxes?
Your task is not done yet. You can further save up on your taxes after you have filed your tax for this year. Think of it as preparation for your next year’s tax payment.
1. Contribute your refund to your retirement savings
After you have finished your taxes and you have your refund in your hand, you can further reduce your tax payments for the following year.
You can contribute a portion of your return towards your retirement savings.
2. Adjust your Form W-4
This is ideally needed if you pay your own taxes and not your employer. You’ll need your W-4 Form after you receive your tax refund.
Any withholding taxes that your employer would have paid on your behalf should reflect correctly in your W-4 Form.
You should revisit your W-4 Form every year to make sure that all information is correctly filled in. You can also respond and seek adjustments to your Form in case of any changes to the tax laws or your personal situation. For instance, if you change your job or have lost wages, you can mention the period in your Form and claim for additional deductions.