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Tax season is almost here.
If you’re dreading filing your taxes this year, the motivation you may need is the possibility of getting a bigger tax refund.
With inflation and the skyrocketing cost of living, that extra cash from the government is needed now more than ever.
So, how do you increase your tax refund? By lowering your taxable income and reducing the amount of taxes you owe to the government as much as possible.
This is where tax deductions and credits come in. With plenty of them to choose from, it may feel overwhelming to navigate what you should focus on.
Not to worry! Daily Hive spoke with fee-for-service financial planner and tax accountant Ed Rempel for the lowdown on the best ways to maximize your tax refund.
Filing season will be here faster than you think! Start early to:
➡️ Find out what’s new for this tax year;
➡️ Avoid interruptions to benefit & credit payments;
➡️ Have time to seek help.More info 👉🏽 https://t.co/DKr20bqk5B #CdnTax pic.twitter.com/iuuvRQqSHv
— Canada Revenue Agency (@CanRevAgency) February 10, 2023
First off, what information should you have ready before filing your taxes?
Before you decide which tax deductions and credits you want to take advantage of, Rempel says you’ll need to make sure you have the receipts to support them.
Of course, you’ll need the usual T4 and T5 tax slips for your income, but the savings will come from deductions and credits, which probably won’t come with slips.
“It is worthwhile for you to collect all your expenses that are deductions and make sure you have receipts or something to support them,” said Rempel. “You should have receipts for donations and medical, but will need to track some expenses like work-from-home expenses.”
He adds that it’s also helpful to keep track of your carryforward balances, or deductions and credits from your last tax return that you didn’t claim.
“Quite a few can be claimed in future years,” he explained.
Tax credit vs tax deduction
Before we get into the different kinds, it’s helpful to know the difference between a tax credit and a deduction.
To put it simply, deductions reduce how much of your income is taxable, while credits lower the tax you owe.
As for which will guarantee you a larger tax refund, Rempel says if your income is over $50,000 a year, tax deductions are your best friend.
“The key difference is that tax deductions reduce your tax based on your tax bracket, while tax credits reduce your tax based on the lowest tax bracket, which is about 20%,” he explained.Â
He gives the example of someone with an $80,000 annual income, who would be in the 30% tax bracket.
“A tax deduction of $10,000 reduces your tax by $3,000, while a tax credit of $10,000 reduces your tax by $2,000,” he said.
He adds that many government benefits are based on your taxable income. So, if you’re a parent using the Canada Child Benefit (CCB), you can get a larger refund if you have tax deductions.
The best deductions and credits to maximize your tax refund
Contribute to your RRSP
“The higher your income, the better it works,” said Rempel.
For example, if you’re income is over $162,000, you can contribute a maximum of $29,210 for 2022. Since you’re in the 45% tax bracket, you should get a tax refund of $13,000.
If you’re not sure how much to contribute to your RRSP to get the best bang for your buck, Rempel says it’s based on:
- RRSP contribution necessary to achieve your retirement goal
- Contributions necessary to maximize your lifetime RRSP room
- How much you can contribute to your current marginal tax bracketÂ
- Your current RRSP deduction limit (which you can find out here)
- Your available cash (or how much you could borrow)
This RRSP calculator can help you estimate how much your tax refund could be.
Claim moving expenses
If you got a new job last year and had to move at least 40 km closer to your new workplace, you can deduct all of your moving costs.
Yes, that means you can claim the costs of flights, movers, selling real estate, getting out of a lease or mortgage, and temporary housing — which can add up to a lot.
Claim self-employment or work-from-home expenses
If you have your own business and you work from home, you can claim business-use-of-home expenses. You can also claim car travel expenses, just make sure you keep this info on record.
If you’re not self-employed, but you still work from home for your job, you can still claim those expenses. Last year, eligible employees got up to a total of $500 back if they worked from home for a maximum of 25o days.
There are no updates as of yet on that deductible this year.
Claim donations
If you’ve donated to a lot of causes this year, you could get some good karma. Rempel says you can get back between 40% to 50% of donations after the first $200 each year.
Claim childcare expenses and family benefits
You can claim childcare expenses like daycares, summer camps, and childcare providers like nannies as deductibles.
As Rempel said, government benefits like the CCB are based on your taxable income, so claiming childcare expenses as a deduction could help you get a bigger refund.
Claim medical expenses
Don’t throw away your receipts and prescriptions for dental checkups, having to buy gluten-free products if you have celiac disease and insulin pens! You could claim medical expenses like these as non-refundable tax credits.
Deduct interest for borrowing to invest
“Borrowing to invest can be the best wealth-building strategy for the right people, done the right way, over the long term,” said Rempel.
Essentially, if you borrow a significant amount of money to make investments, the interest could be deductible, and get you a huge refund.
Carryforward balances
Didn’t claim some tax deductions or credits from the 2021 tax year? No sweat.
Rempel says you can still claim a lot of them years after.
He gives the example of RRSP contributions that you weren’t able to deduct last year. You can include that in your tax deductions this year for a bigger refund.
For university students, Rempel says tuition credits are limited by income, so you may have unused credits left to claim.
If you’re self-employed, you can only deduct work-from-home expenses based on your use of the space to earn business income.
However, Rempel says you can carry that forward to claim the deduction against next year’s business income.
Charitable donations are limited to 75% of your income but can be carried forward for up to five years, according to the financial advisor.
Lastly, moving expenses can only be deducted based on your job income from that year, but if you started later in the year and didn’t earn enough, you can claim them the next year.