With the holidays just around the corner, tax planning can sometimes take a backseat to other matters. Those who want to take full advantage of the various tax credits, deductions and other opportunities for tax savings need to act quickly, before the year-end arrives.
By planning now and consulting our list of tax planning tips, you can easily track what you need to do in order to have more money to spend in 2015.
1. Charitable donations and gifting: Making a charitable donation is one option for reducing the personal tax you pay. December 31, 2014 is the final day to make contributions to a registered charity in order to get a donation tax receipt to claim on your 2014 income tax return. You may even qualify for the Canadian Federal “First-Time Donor’s Super Credit”. Keep in mind that gifting stocks or mutual funds with accrued capital gains to a registered charity provides investors with an opportunity to eliminate tax on the sale of their investment, and at the same time help a worthy cause. For U.S. taxpayers, keep in mind the $14,000 annual gift tax exclusion limit for 2014 and potential gift tax consequences of gifting over this annual exclusion limit in certain circumstances.
2. Prepare for retirement with your RRSP conversion: If you are turning 71 in 2014, you cannot have an RRSP after Dec. 31. Consider making your expected 2014 RRSP contribution in December before converting your RRSP into a RRIF or registered annuity. When setting up the RRIF, you can base the withdrawal schedule on the younger spouse’s age, thereby minimizing the required minimum annual withdrawals and the taxable income they generate in future years.
3. If you turned 65 in 2014 and have not yet applied for Old Age Security benefits, remember that retroactive benefits, which can be worth over $6,500, can only be claimed within a limited time. To receive those benefits, you should apply as soon as possible.
4. Registered Education Savings Plan: A registered education savings plan allows you to save for your children’s post-secondary education in a tax-efficient manner. If you are contributing to a RESP, contribute the maximum allowed in order to qualify for the 20% Canada Education Savings Grant by Dec. 31. If you haven’t maximized RESP contributions for your children or grandchildren, you can make an enhanced catch-up contribution in 2014. Be sure to take note of the foreign grantor trust rules if the subscriber or contributor to the RESP is a U.S. person (Refer to our posting “The Drawbacks of U.S. Citizens Owning Foreign Trust Accounts” from May 7, 2014). Please also refer to our posting “Registered Education Savings Plan (RESP)” from May 7, 2014 regarding potential RESP over-contribution penalties.
5. Capital gains and losses: If you realized losses on your investments in 2014, you may want to consider selling some appreciated investments to realize gains to offset the losses. Losses realized in 2014 may also be able to be carried back to past years to write-off against gains realized in previous tax years. Alternatively, if you realized losses in previous years and have a capital loss carry forward, you may want to consider selling appreciated investments in 2014 to be able utilize the previous years’ losses against the current year realized gain. However, be aware of superficial losses or “wash sales”!
6. Accelerate Business Purchases: For those that may be self-employed or are small business owners, you may want to consider accelerating business purchases. For unincorporated businesses, these purchases would be made before December 31. For incorporated businesses, these purchases would be made before the end of your fiscal year. By accelerating your business purchases, you may be able to claim more expenses in 2014 and reduce your taxable income. However, you also need to consider how accelerating these expenses will affect future tax years.
7. Incorporated owner-managed businesses: Before the finalization of your fiscal year end, the owner manager should consider the most tax effective mix of salary and dividends from your company. Dividends typically result in a lower tax rate for most individuals; however, other items such as the tax effect on the company when paying dividends over salary, the taxpayer’s age, RRSP contribution limits, CPP contributions, and other factors must also be considered when determining the most tax effective mix of salary and dividends.
8. Net Investment Income Tax (NIIT): This is a surtax that is applicable to U.S. taxpayers only. This 3.8% surtax is assessed on net investment income (i.e. interest, dividends, rents, royalties, capital gains, etc.). This surtax is assessed after foreign tax credits are claimed, and is applicable if modified adjusted gross income is over applicable threshold amounts. Some strategies are to ensure that your income is below the threshold amounts so as to not trigger the surtax, to increase the amount of your quarterly estimated tax payments if you anticipate paying this surtax, or to manage your passive sources of income to reduce the amount of income that the surtax will be assessed on.
The items listed above are only a small amount of the tax-saving tips that are available to individuals and businesses. There are a multitude of other tax-saving strategies, which we would be happy to discuss with you based on your specific filing situation.
Year-end tax strategies should be reviewed by a qualified Quon and Associates tax specialist to ensure that regulations, laws and individual personal considerations are taken into account before taxes are filed. Call us or visit our website for more information. 403-250-5111.