There’s an old adage that “there are only two certainties in this world: death and taxes”. Planning is required for both, but death only happens once in a lifetime (usually). Taxes are an annual festivity that should be properly planned for throughout the year.
That’s right – you shouldn’t leave tax planning until the month that you do your taxes because it’s generally at least 2 months too late to make any change to the outcome of your previous year’s taxes.
So what steps can YOU be taking throughout the year so that you’re not handing over more money to the tax man than you have to?
1. Know your numbers… approximately
Every year may be different for you, but if you can forecast what your income will be, what tax you’re remitting throughout the year, and what tax deductible expenses you’ll have you can approximate what your final outcome will be. For those who are earning an income and not have income taxes and other deductions remitted on their behalf (i.e. self-employed or some contract workers), this can be a bit more involved but often will include more eligible tax deductions to offset what you would owe. If you know you’ll have to pay taxes, be sure to put money aside throughout the year so that you’re not stuck with a tax bill you can’t pay, and the consequential interest and penalties associated with a late payment.
2. Plan ahead and be strategic
Once you know your approximate numbers, and if you’ll have to pay tax, you can plan ahead so that you’re not having to “create” tax deductions at the eleventh hour. This proper, year-round planning can allow you to be strategic with how you spend your dollars to garner the best possible tax deductions. Planning ahead can also help when it comes to large tax matters such as the sale of an investment property where you know tax will need to be paid. Having other tax deductions to help your overall tax picture will help.
For all my lovely self-employed people, with so many available tax deductible expenses for small business owners, proper planning allows you to make purchases or reinvest in your business in the best possible way so that you’re not only spending your money where needed, but reducing your tax burden as well.
3. Have your tax planning become part of your overall financial planning
Whether you review your financial planning annually, or when there are significant changes needed, your tax planning should be part of that process. That life change, or windfall could have tax consequences you haven’t considered, or may down the line, so setting things up in advance to be as tax-efficient as possible is the best option.
This also includes any major change of income. For example, for those individuals who have received government assistance through the COVID-19 Economic Relief Package in Canada, while every dollar now may be going towards the regular monthly expenses you have to remember and plan for paying the tax on those payments received in 2021. That means putting some funds aside once you’re getting back on your feet, OR if you’re used to getting a tax refund and earmark those dollars for something each year you should be planning on not receiving what you usually would, if anything.
Certainty gives peace of mind, and in uncertain times like these the best is to plan so there are little to no surprises. This can include the help of a financial professional who can do that planning with you, or just some research and thoughtful care to plan on your own. We could all use a few less surprises these days.