Tax planning parameters

The best way to save money on your income taxes over the long term is to know some basic tax planning parameters. Do you know the rate of tax you pay? Do you know the tax bracket you’re in? Are you aware that different types of income are taxed in different ways? And just how much did it cost you not to make that RRSP contribution last year?

Making tax-aware decisions throughout the year — not just at tax filing time — is the key to minimizing the taxes you pay.

Tax planning is legal. It is every Canadian’s legal right and duty to pay only the correct amount of tax, no more and no less, and to arrange affairs within the framework of the law so as to pay the least amount of taxes possible.

While there are many ways to calculate your tax return correctly, your goal is to prepare your return to your family’s best benefit for today and into the future. Here are some ideas on filing your 1999 income tax return to maximize your after tax results:

Your Ten Point Plan To Long Term Tax Savings

  1. Start the process to lifetime tax savings by properly entering the income, deduction and credit data on the tax return ofach taxpayer in the family, using all available tax provisions to the maximum advantage. Then, once your tax return is completed, focus on Year 2000.
  2. Understand what rate of tax you are paying on your current income sources, and the prospective tax burden you face during your productive lifetime.
  3. Anticipate changes that may happen in the short term. These could be personal:
    • a marriage, divorce, or new common-law relationship
    • a new baby. . .who comes to live with grampa and grandma.
    • a move to another province
    • a return to school
    • coping with death of a loved one
    • loss of a job or sale of a business
    • retirement
    • disability or prolonged illness
  4. Or you might decide to make some strategic investment changes:
    • a vow to maximize RRSP contributions
    • a change from interest to dividend producing investments
    • acquisition of a capital asset
    • acquisition of a life insurance policy
    • withdrawals from a RRIF
    • requirement to make instalment payments
  5. Project the financial affect of these changes by preparing an estimate of Year 2000 income, deductions and credits.
  6. Determine your actual and marginal tax rates for both this year and next, to plan your after-tax earnings and investment strategy.
  7. Plan your minimum tax withholding and instalment payment requirements.
  8. Find out your target RRSP savings for the year and commit to making the contributions.
  9. Discuss your after-tax investment objectives with your financial planner.
  10. Update your will and estate planning portfolio every year before finalizing your return.
  11. Prepare your tax return every year and on time, starting with the lowest income earner and moving to the highest, in order to maximize transferrable provisions.

Excerpted from The Jacks on Tax Online Update Newsletter.