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TAXFlash News from IncomeTaxCanada.net
:: Tax brackets are irrelevant to tax credits, which allow all taxpayers the maximum benefits for charitable donations
:: In my last article I reviewed several situations where it makes sense to fight the urge to deduct expenses when calculating taxable income. This week I’ll turn my attention to circumstances in which taxpayers may want to consider deferring claims for certain credits that can be used to reduce personal income tax. Where discretion is provided, deciding on when to claim a tax deduction requires taxpayers to have a good working knowledge of income tax brackets. The value of a tax deduction or “write-off” is dependant upon the tax bracket of the taxpayer. The higher the tax bracket, the greater the tax saving achieved by claiming a deduction. If discussion about tax brackets confounds you, don’t worry – where tax credits are concerned, tax brackets are irrelevant. How so? Well, as the name implies, a tax credit is a direct reduction of tax, dollar-for-dollar. This means that a $100 tax credit claimed by you will save the exact same amount of income tax as the same credit claimed by the richest taxpayer in the country. Purists will note that this isn’t technically correct where surtaxes are involved but, since we no longer have surtaxes in this province, the equality of tax credits for all taxpayers holds true. In general, tax credits must be claimed in the year – basically it’s use it or lose it. Generalizations being what they are, there are several exceptions savvy taxpayers should keep in mind if they want to minimize their tax load. Consider the case charitable donations. The charitable donation credit is in a league of its own because of the manner in which the credit is calculated. The first $200 of charitable donations claimed receive a credit in BC of approximately 22 per cent which is essentially the same as a tax deduction at the lowest marginal tax rate. In terms of dollars and cents, what this means is that taxpayers will save $22 of tax for each $100 of donations. Charitable donations in excess of $200 in the year receive more generous treatment. In fact, donations above this amount receive a credit in BC of roughly 44 per cent which is equivalent to a tax deduction at the highest personal rate of tax. In other words, $44 of income tax is saved for every $100 donated – this is twice the tax saving achieved by donations under the $200 threshold. Knowing that donations over $200 save twice as much tax is incentive enough for taxpayers to try and group or bunch their donation claims. What’s really great is that taxpayers can actually use the charitable donation rules to achieve this higher tax saving and it’s above board to boot. Claiming charitable donations is discretionary. According to the applicable rules, unclaimed charitable donations can be carried forward and claimed in any of the five following tax years. Put these two facts together and you’re on the road to greater tax saving. The idea here is to forego claiming charitable donations made in one or more years with the objective of combining the amounts for one “super” donation claim in any of the next five years. This works particularly well for taxpayers who regularly donate less than $200 per year. By making annual charitable donation claims these people will never benefit from the extra credit for donations over $200. They can get there, however, by accumulating their donations for several years before making their claim. Let’s turn our attention now to the medical expense credit. The medical expense credit is actually formula based whereby only medical expenses in excess of a threshold amount can be used to produce a credit claim. The threshold is calculated at the lesser of 3 per cent of net income and $1,728. So a taxpayer with net income of less than $57,600 will have to incur medical expenses in excess of 3 per cent of their net income to generate a tax credit. Taxpayers with a net income over $57,600 will simply have to spend more than $1,728 on medical expenses. For many taxpayers spending the necessary amount on medical expenses is a challenge meaning oftentimes taxpayers cannot claim the medical credit. But there is hope. You see medical expenses can be claimed for any twelve-month period ending in the year. For example, if a taxpayer picks a twelve-month period ending on January 31, 2002, medical expenses paid from February 1, 2001 through to January 31, 2002 may be claimed on the taxpayer’s 2002 personal income tax return. Time for a bit of tax planning. Consider the case of a taxpayer earning $60,000 per year. Assume this taxpayer paid $2,000 for dental work in December 2002 and another $2,000 in January 2003. If this taxpayer claims medical expenses on a calendar year basis the threshold formula results in only $272 ($2,000 less $1,728) of the medical expense being eligible for consideration in the medical credit calculation in 2002 – the same result will occur in 2003. Following this approach, the total medical expense eligible for credit over the two-year period would be $544 ($272 in each year). Rather than accept this miniscule credit, a wise taxpayer would choose to forego claiming the December medical expense in 2002 opting instead to group this expense with the January 2003 medical expense for claim on his or her 2003 personal tax return. This could be accomplished by the taxpayer choosing a twelve-month medical expense period that starts in December 2002 and ends in November 2003. This strategy will result in a medical expense claim of $2,272 ($4,000 less $$1,728) in 2003 or more than four times the credit produced by selecting a twelve-month period that coincides with the calendar year. Knowing what to do here is pretty clear to me. As in the case of tax deductions, knowledge of the tax rules and your particular situation are essential if you want to maximize your tax saving – and who doesn’t
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney