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People are always telling me why they can’t save. In the next breath they tell me about the tax refund they’re getting.
I ask, “Why would you give the government an interest-free loan? Are you cray-zee?”
They say, “It’s like forced savings.”
So what they’re really saying is that they can’t keep their sticky paws off their savings and would rather earn no interest on their money. Hmm.
Reality check: Money in your pocket now is better than money in your pocket down the road.
And yet every year about two-thirds of the people who file a tax return in Canada end up getting a refund, with the average refund running to just over $ 1,400.
Geeze Louise! That’s more than $ 100 a month you could have put to work for YOU.
Start by reviewing your TD1 Form to make sure you have only as much tax as necessary withheld. If you just got married and your mate doesn’t have an income, you can update your TD1 to claim the spousal amount. Ditto if you’re new to the workforce and plan to claim tuition credits you’ve carried forward.
Here’s a form that very few people use, but is remarkably useful for keeping money out of the government’s hands: Form T1213: Request to Reduce Tax Deductions at Source. This form lets you request permission from the Tax Man to have your employer reduce the amount of income tax taken off of your paycheque every month.
If you can demonstrate that you’re eligible for certain recurring deductions that will reduce your tax bill at the end of the year, you can trade in your tax refund for more take-home pay.
Do you make monthly RRSP contributions by way of pre-authorized withdrawal? You’re eligible. How about child-care expenses? If you’re tithing monthly, you can do it for your charitable donations. If you have rental losses, interest expenses on investment loans or carrying charges, those are eligible too. So are support payments.
You’ll have to fill out the form and send it to the Tax Man every year. You can do it at any time, but the best time is in October or November for the following year, so open up your diary and set a reminder right now. Once you’re approved, the Tax Man will provide instructions by letter to you, which you then give to your employer, who will adjust your pay for the remainder of the year.
Fill out Form T1213 and get the Tax Man’s approval and instead of paying extra tax and getting refunded, you’ll pay less tax on an ongoing basis so you’ll have more cash that you can then use to establish an automatic savings plan.
Whether you send that money to your RRSP, your TFSA or your high-interest savings account, it’s way better in your hands than in the Tax Man’s.