You can never run away from the tax man no matter the tricks and hacks you apply. It is better for you to start planning your tax early and keep things in order. There are several tips on how to go about this.
Planning your deduction method
When completing your tax return, you have a choice between standard or itemized tax deduction methods to determine taxable income. The standard deduction is a dollar amount set by the government that you can claim without accounting for the expenses that typically make up a taxpayer’s allowed deductions. Itemized deductions are actual expenditure you make for deductible expenses. Your actual purchases in a tax year may amount to more than the standard deduction amount. If that’s the case, you’ll likely pay less tax or get a larger refund using the itemized deduction method. However, the itemized method requires support in the form of receipts and other documents to demonstrate these amounts were actually spent. Consider a filing system to save receipts. Even if you choose to claim the standard deduction, having receipts on file will help you make an informed choice at tax time.
Retirement savings strategies
“Savings plans such as qualified individual retirement arrangements save you tax in the current year, investment earnings grow tax-free year to year, and provide income for retirement, when you may be taxed in a lower bracket,” says James Windsor, certified public accountant from Ann Arbor, Mich. Many taxpayers turn to retirement plans for both the tax reductions now and income later. With a tax rate of 25 percent, for example, contributing $15,000 to a retirement plan may save you $3,750 on your current tax return. Investment earnings on money in your account are not taxed until withdrawal. Maximizing your annual contributions to retirement accounts may be an effective cornerstone for your basic tax planning strategy.
The tax man wants to ensure that the government gets its revenue. They do what is best for the government and there are some things they will never tell you. For instance they won’t tell you that you can access tax software for free or that rewards are taxable among other things.
1.You may be eligible for free tax software
If you earn less than $57,000 annually, many major tax program companies will provide services for free. You can view a list of them here. Even if you don’t qualify for the program you want, everyone is eligible to use the IRS’ online forms, which cuts down on paperwork, if not costs.
2.Rewards may be taxable
Did you get any rewards this year? You may have gotten them and not be aware that they might be counted as income and therefore could be taxed. An obvious example: When Oprah Winfrey gave her entire studio audience cars back in 2004, the lucky individuals had to pay taxes of up to $7,000 since the value of the vehicles was counted as income. The same principle applies to rewards you may have gotten, say, from your credit card companies—frequent flier miles, for example—though you’re in the clear with bonuses that are specifically tied to purchases. It’s good to keep track of these over the year to avoid surprises.
If you are planning your tax then you should know how to do so and save money while at it. You can contribute more to RRSP or read in between the lines when signing a waiver.
How to save money during tax time
Consider making a $2,000 over-contribution to your RRSP.
Tax rules allow you to contribute up to $2,000 more than what you’re eligible to contribute to your RRSP without attracting the usual excess contribution penalty, which is one per cent of the excess amount for every month of the contribution year that it stays in the RRSP.
Proceed cautiously if a CRA auditor asks you to sign a waiver.
Under normal circumstances — in other words, no suggestion of outright fraud — the tax department has three years to carry out a reassessment of your tax return.
Sometimes, if the clock is ticking down on that 36-month deadline, a CRA auditor will ask you to sign a waiver to allow the agency to conduct its reassessment after the three years are up.