With a new year upon us, it’s a good time to consider your financial and tax resolutions. Here’s our list of New Year tax resolutions to help get your year off to a good start.
1. Create a budget: In order to manage your finances you need to develop a budget that you can stick to. Start with prior year`s income and remove taxes first. Taxes are easy to forget because they are usually due at the end of the year when all the money has already been spent. After taxes, write down your monthly recurring expenses such as mortgage payments, car payments, cell phone and internet. Estimate amounts for non-recurring expenses you know you will have such as gifts, meals and travel. Finally, ensure there is an emergency fund set aside to cover your personal expenses for 90 days.
2. Identify your debts and pay them off in the correct order: While you may not be able to achieve it in one year, being debt-free is a goal shared by many. Paying down debt the right way will help you minimize your taxes and pay off debts faster. In general, you should pay off high interest debt such as credit cards first or anything over 5.0% regardless if it is tax deductible or not , then non-deductible debt such as student or personal line of credits and lastly tax-deductible debt such as investment loans or your practice debt.
3. Plan to make a mortgage prepayment: Most mortgages allow you to make an annual lump sum prepayment without penalty. Even if you can`t make the prepayment this year, mark the next mortgage prepayment on your calendar so that you can budget to have savings ready for the next opportunity.
4. Mark your calendar for important tax dates: The key to avoiding interest and penalties is paying and filing your taxes on time. There are more tax deadlines than just April 30th. Ask your accountant for a list of dates you should know and mark them in your calendar.
5. Pay your tax installments on time: Instalments are required when you receive income that does not have sufficient taxes withheld. This would include dividend, interest, capital gains, business and rental income among others. Instalments are usually based on the previous year`s tax bill. By budgeting for and paying your tax instalments on time, you will minimize the risk of a large unexpected tax bill at the end of the year.
6. Top up your Tax Free Savings Account (TFSA): January 1st is the first day you can contribute an additional $5,500 into your TFSA. All income earned inside a TFSA is tax-free. Even if you are a risk adverse investor, a TFSA will let you park your cash to earn tax-free interest and give you the flexibility to take it out when you need it. You won’t receive a tax deduction on contributions to a TFSA, but since there are no taxes on withdrawal, a TFSA can serve dual purpose as both an emergency fund and a tax-efficient savings account. If you have not contributed to a TFSA before, you can deposit up to $36,500 as of January 1, 2015 to earn tax-free investment income.
7. Top up your RRSPs: If you have the contribution room available, would like to reduce your tax bill and invest in your retirement, consider topping up your RRSPs. The deadline to contribute is March 2, 2015. A $10,000 RRSP deduction could mean a reduction in taxes of $4,953. If you are not a regular RRSP contributor and would like to contribute this year, you should factor this into your budget by setting aside funds to be contributed to your RRSP. It is easier to contribute each month to a RRSP versus contributing one large lump sum.
8. Top up your Registered Education Savings Plans (RESP): Consider an RESP to spread the burden of your children’s education costs into manageable amounts. You can contribute up to $50,000 to an RESP and receive a grant of up to $7,200 for the lifetime of your child. There is no annual limit; however you can only receive the annual $500 grant on the first $2,500 in contributions each year. Any additional contributions in the same year are not eligible for the grant.
9. Keep your tax records organized: Consider going paperless and scanning all relevant information monthly into a safe and secure folder on your hard drive. The folder can then be sent to your accountant electronically. You can even get a low income family member to assist with this and pay them a reasonable amount, thereby reducing your family’s overall tax bill. This makes organizing your records easier and tax friendly.
10. Budget some time and money for fun: Creating an annual financial plan won’t be a priority if you don’t remember to budget some time and money for fun such as travelling. If you time your vacation with an eligible professional development course, seminar or convention, a portion of your trip could be tax deductible.
The beginning of a new year gives you a fresh start to set and achieve new goals. If you implement the above resolutions, you can look back this time next year and see that achieving your financial goals can be painless.