Put it off! When it pays to defer tax claims and deductions
The tax season is filled with reminders to save taxes by making that charitable donation by year-end and making that RRSP contribution by March 1.
But it turns out there are quite a few situations when it may generate a bigger payoff by putting off some of your favourite tax-saving moves until a later year.
When not to deduct RRSPs
You can contribute to your RRSP at any time. But that doesn't mean you have to take the deduction in the year you made it. You may be able to save hundreds or even thousands of dollars by putting it off.
For instance, if you're going to be in a higher tax bracket next year, delaying your claim could really pay off. Let's say you made $40,000 in 2010 and made a $3,000 RRSP contribution. If you claimed it this year, the tax savings would be about $720, as your marginal tax rate at that level of income is about 24 per cent (varies by province).
But if you expect to earn $60,000 in 2011, you will be paying tax at a 31 per cent marginal rate. So that $3,000 deduction would be worth $935 if you deferred it by a year. That's an extra $215 in your pocket just for delaying the deduction for a year.
"This is where some basic knowledge of tax brackets is valuable," says Talbot Stevens, a London, Ont.-based financial educator. KPMG has a table that lists the various tax brackets for each province.
|Federal income tax rates and brackets - 2010|
|Tax rate||Tax bracket|
|15%||Up to $40,970|
|22%||$40,971 to $81,941|
|26%||$81,942 to $127,021|
|29%||$127,022 and over|
Similarly, if you won't owe tax at all in 2010 — either because you had little income or had significant business losses that offset other income — you won't want to take that deduction immediately. Better to carry forward on Schedule 7 until a year when you have taxable income.
There are also situations when you may want to claim only part of an RRSP contribution and carry forward the rest.
Let's assume a woman in Ontario got an inheritance or arranged a top-up RRSP loan and plunked $15,000 into her RRSP in 2010. Let's also assume she made $50,000 that year.
The experts say she should only deduct enough to get to the start of her current tax bracket.
In this case, she should claim only $9,000 for 2010. That would reduce her income for tax purposes from $50,000 to $41,000, where the 31.2 per cent marginal tax bracket starts. If she were to deduct any more than that $9,000, the tax savings on the excess would be based on a lower tax bracket that is less than 31 per cent. She should instead carry forward the remaining $6,000 deduction to the 2011 tax year, when she will get the full 31.2 per cent refund for the entire contribution.
"The RRSP is a deduction that reduces net income on your tax return, and net income is used to calculate your refundable and non-refundable tax credits," points out Evelyn Jacks, author of Essential Tax Facts and the president of the Winnipeg-based Knowledge Bureau.
"So we look at the effect of an RRSP deduction on all those things before we make a decision on whether or not to defer an RRSP deduction."
Jacks says tax software programs are good at storing data, so you can keep track of your tax situation from one year to the next. "You need to keep on top of your carry-forwards."
When not to claim charitable contributions
Charitable contributions give donors a two-tier credit. On the first $200, contributions generate a 15 per cent federal tax credit. On amounts over $200, the credit is 29 per cent. So tax specialists say if you don't crack the $200 limit one year, it could benefit you to delay making that claim.
A $200 claim in each of two years would yield a tax credit of $30 each year, for a total of $60. But a $400 claim in one year would yield a federal tax credit of $30 for the first $200 and $58 for the second $200, for a total of $88. Add in provincial tax credits and the difference is even larger.
"The CRA's administrative policy also allows a donation made by one spouse to be split between the two spouses in whatever proportion they choose," say the experts at KPMG in Tax Planning for You and Your Family 2011. "Further, spouses may be able to claim each other's unused charitable donation carry-forwards from a prior year."
One more point: charitable contributions can be carried forward up to five years, unlike RRSP contributions, which can be carried forward indefinitely.
When not to claim moving expenses
The tax department allows you to deduct moving expenses when you start working at a new place and move to a home that is at least 40 kilometres closer to your new work location than your old home was.
Those moving expenses can be huge. With housing so expensive these days, real estate commissions alone can easily amount to $20,000 in many cities. Add in legal and other relocation costs and the total moving bill can top $30,000.
These expenses are claimed against income at the new location. So if you moved in October and only made $20,000 in your new location in the rest of that year, you can deduct $20,000 of your moving expenses in that first year and carry forward the other $10,000 in unused expenses to the next year.
When not to claim medical expenses
Medical expenses above a certain threshold give rise to a 15 per cent federal refundable tax credit. Qualifying medical expenses that exceed three per cent of your net income (to a maximum of $2,024 in 2010) are eligible for the credit.
What many people may not realize is that the expense claim does not need to be based on a single calendar year.
"Medical expenses can be claimed in any 12-month period ending in the tax year you're filing for," Jacks tells CBC News. "You can choose not to claim your medical expenses this year if you think you're going to have a better claim in a 12-month period ending in the next tax year."
KPMG also points out that the key is when the expenses are paid, not when the service was performed. "If you are using a December end for the 12-month period, and you have pending expenses (perhaps for medical equipment purchases or large dental bills) that are due early in the new year, consider prepaying them so that you can claim them one year earlier."
When not to claim education tax credits
If students don't need to use the tuition tax credit, the education amount or the textbook tax credit because they have no tax to pay, they can transfer those credits to their spouse, common law partner, or even a parent or grandparent. They can also carry forward any tuition, education or textbook credit they didn't use or transfer to any future year when they will have tax to pay.
When it comes to tax planning, it's frequently a question of timing.