With tax season just around the corner it is the perfect time to begin thinking about how to get the most out of your deduction. Maximizing your tax return from 2023 requires some careful pre-planning and strategic decision making throughout the year.
Know Your Total Taxable Income
The first step in ensuring you get the best return possible is to calculate your total taxable income. Once you have this information, you are then able to figure out the best credits and deductions to use to reduce your tax liability.
Keep Accurate Records:
As you anticipate the announcement of the 2024 tax filing deadlines, consider taking proactive steps by starting to organize and maintain detailed records of all your financial transactions, including income, expenses, and deductions. Having all of this information collected and sorted before the peak of tax season will not only save you valuable time but also ensure that you are well-prepared to claim all eligible deductions and credits when the time comes.
Contribute to RRSP or TFSA Accounts:
A good strategy to lower your taxable income before tax season is to start contributing to a RRSP. The amount contributed to your RRSP can be deducted from your total income, reducing the amount of tax you are subject to at the end of the year. One thing to remember is that there is a cap on your annual contribution based on your previous years income. Another account to contribute to to reduce your tax liability is a TFSA. They are not tax-deductible like the RRSP’s are, but any income or gains you earn within the TFSA are tax-free. This allows your investments to grow without increasing your tax obligations.
Utilize Tax Credits and Deductions:
Using any available credits or deductions is an excellent way to directly reduce your tax liability. Take a look at the full list of available credits and deductions, evaluate which ones you qualify for, and prepare the necessary documentation to claim them. This process can help minimize the amount you owe or maximize your return. Common credits and deductions in Canada include the Canada Child Benefit, the Canada Caregiver Credit, charitable donations, home renovations, the Home Accessibility Tax Credit, the Medical Expense Tax Credit, and the Tuition Tax Credit. To ensure you have all the information needed to claim the appropriate credits and deductions you qualify for, utilize our comprehensive document collection checklist.
Explore Tax-Efficient Investment Opportunities:
Investing in tax-efficient funds or assets that could generate capital gains can be a good way to generate more income while potentially remaining in a lower tax bracket. In Canada, only 50% of capital gains are included in taxable income, which means you will be taxed on only half of these gains. Certain investments, such as Canadian dividend stocks, may make you eligible for the dividend tax credit, lowering the tax rate on the dividend income received. Additionally, you can consider a strategy called tax-loss harvesting, which involves selling investments that have experienced capital losses to offset any gains in your portfolio. This can effectively reduce the amount of taxable capital gains.
Plan for Charitable Donations:
Another great way to reduce your taxable income is through charitable donations. Any donations made to a non-profit organization can be used to claim a federal tax credit, which is calculated as a percentage of the donation amount. This tax credit can be used to reduce your income thus reducing your tax liability. So essentially the more generous you are, the larger the tax credit you can claim.
Claim Business Expenses:
If you are a business owner or self employed, you can use your business expenses as a deduction to reduce your tax owing amount. Make sure to keep track of all eligible business expenses, such as mileage, home office expenses, and business-related travel, throughout the year to use as a tax deduction when tax season rolls around.
Consult a Tax Professional:
Tax laws and regulations change regularly, and they can be complex. Hire a tax or bookkeeping professional that you trust to be your advisor and help you navigate the tax code and identify additional deductions or credits you may be eligible for. LedgersOnline has a team of experienced bookkeepers who can help guide you through the process.
As tax season approaches, the workload can become quite overwhelming. Simplify the process by taking advantage of our standalone product TaxDocs, built with the core elements from our powerful file management system; LedgerDocs. It will help you to easily and efficiently store and organize documents in one central and secure place. And when it’s time for you to access your files, our automated tagging feature makes it easy to retrieve documents when you need them.
Remember that the key to maximizing your tax return is proactive planning, organizing your receipts, invoices and documents and seeking out the appropriate guidance to help you navigate your circumstance. If you keep these strategies in mind throughout the year, you can ensure you’re in the best position come tax season.
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