Giving the gift of tax freedom

Christmas has just gotten a lot easier in Canada, thanks to the Santas in the federal government.

Why would you give anything less than a Tax-Free Savings Account (TFSA) to your loved ones? It is probably the most important economic gift you can give to the adults in your family, allowing them to accumulate, grow and preserve future wealth completely tax free. And, as of Jan. 1, you can contribute to your TFSA an additional $500, taking the annual maximum to $5,500.

Because unused contribution room to TFSAs accumulates and as TFSAs were introduced in 2009, if you have not contributed to a TFSA, you can now contribute $20,000. With the new contribution level for 2013, total possible TFSA contribution room will amount to $25,500 as of Jan. 1.

But let’s assume you start your TFSA in calendar 2013. Just think: Tax freedom via a TFSA could be yours if you put $458.33 every month into your TFSA. That’s about $230 from every paycheque. But even if you can’t afford to contribute the maximum, opening a TFSA account is the first step. If you are a Canadian resident who is at least 18 years of age, do that before yearend and be ready to contribute in 2013.

According to the federal Department of Finance, 8.2 million Canadians have done just that, with roughly 25% of them contributing the maximum amount in 2011. While that’s a great start, that leaves 75% not making the maximum contribution. Still others are missing out entirely. This points to a need for financial planning and some stealth budgeting to take full advantage of the cornerstone of every family’s wealth. Your financial advisors can help and now is a good time to contact them — before you spend too much on gifts that will depreciate rather than grow in value.

Consider gifting your adult children up to half their TFSAs. Hopefully, they will match it with tax-efficient investment decisions. It’s a opportunity to teach tax literacy at its finest. A good question to consider as the family gathers around this holiday season is: What would you have to give up to secure your tax-free future income? It’s a good discussion and an easy one, because it can focus the economic power of the family and bring even young adults into a financial discussion.

It’s Your Money. Your Life. Make sure your family is on the “TFSA for Tax Freedom Plan.” The TFSA should be a cornerstone of every family’s wealth-management plan. If you miss out on making that $5,500 contribution in 2013, you could compromise a tax-free pension in your future.

Evelyn Jacks is the president of Knowledge Bureau, a national designated educational institute focused on excellence in financial education for financial advisors and their clients. She is also a respected author on tax and has just released her 49th and 50th books, Jacks on Tax and Essential Tax Facts. Also, consider taking a certificate course on tax-efficient retirement income planning and Real Wealth Management.


Plan now to avoid overpaying annual taxes

Now is the time to do year-end tax planning — to ensure you do not pay more income taxes than necessary.

There are two very good reasons to start your yearend tax planning now:
• If you pay your taxes in quarterly instalments, you need to review income earned in the current tax year so as not to overpay your December remittance.
• By planning ahead, you can reduce taxes payable for 2012 — by giving to charity before yearend, for example, or by freeing up funds to make an RRSP contribution or digging for receipts so you can claim all the write-offs for which you qualify.

For most people, the final quarterly tax instalment of the year is due Dec. 15; only farmers and fishers are required to make an advance payment on taxes owing on Dec. 31. If your income has dropped over the past year, your final instlament may not be as large a payment as expected, or you may make no payment at all. See your tax advisor to prepare an exact estimate.

Next, understand how contributing to your RRSP can reduce your net income and, thus, the amount of taxes you pay. That’s particularly important if you are in a clawback zone for social benefits such as Old Age Security or Canada Child Tax Benefits. It’s smart planning, too, as your lower tax bill could increase your cash flow throughout 2013.

Maximizing deductions such as childcare expenses and moving expenses also help reduce your net income. But remember: you’ll need all the receipts to file an audit-proof tax return.

When it comes to your non-refundable tax credits, December is a good time to make appointments to buy glasses, contact lenses and hearing aids or to do expensive dental work if, by doing so, your increase the amount that qualifies for the medical expenses claim. But first check with your tax advisor to see how much you need to spend to make a difference on your return.

Also note that for the first time starting in 2012, the new Family Caregiver Tax Credit will increase various provisions on the tax return including your Spousal Amount. If the health of your family members has changed in the past year, be sure to ask your tax advisor for guidance on claiming new tax credits in 2013. You may be able to reduce your withholding taxes on your January paycheque by completing a TD1 Form to take into account this new information.

It’s Your Money, Your Life. You are required to pay only the correct amount of taxes — no more. Your tax advisor can help you increase your cash flow if you wish to save money on your 2012 tax return, but do make the appointment before year-end.

Evelyn Jacks is the author of 50 books and the president of Knowledge Bureau, a national designated educational institute focused on excellence in financial education for financial advisors and their clients. For information about certificate tax, retirement and investment courses, click here or call 1-866-953-4769.


“Fiscal cliff” has immediate implications

The U.S. is fast approaching its “fiscal cliff” and how it resolves that challenge has implications for Canada and the world.

At midnight on Dec. 31, 2012, unless President Obama and the Republican-held House of Representatives reach an agreement, several tax cuts will be rolled back and Americans of all descriptions will face higher taxes. The 2% temporary payroll tax cut will disappear, as will tax breaks for businesses and the middle class. Calculations under the Alternative Minimum Tax (AMT) will change. Just as devastating, 1,000 government programs will experience spending cuts.

A jump off the fiscal cliff would cut the U.S.’s US$16-trillion deficit in half but it could also push the U.S. economy into recession. Half measures, on the other hand, could stave off a recession but would increase the deficit and extend the economic pain.

The governor of the Bank of Canada, Mark Carney, in a Nov. 8 speech to the Canadian Club in Montreal, called this a “big” and “almost immediate risk,” one in which “the impact would begin on Jan. 1 if there’s no movement among American authorities.” He also noted: “The hardest-hit areas of the Canadian economy would be exports and business investments.”

What can Canadians do to prepare for the fiscal cliff? From the vantage point of considering this newest financial challenge with 150 tax and financial advisors from across Canada at the Distinguished Advisor Conference this week, one proactive and positive solution would be to spend more time with these professionals before yearend.

Although it is hard for individuals to affect the choices of policy makers directly as they navigate through these uncharted financial waters, there is much we can do to preserve and grow wealth despite the times. This includes keeping a vigilant eye on tax erosion and the cost of fees and hedging against future inflation or interest rate hikes with proper debt management.

It’s Your Money. Your Life. Jumping off a fiscal cliff without a plan for a soft landing is never wise. Your Real Wealth Managers — designated specialists who have the skills to plan your investments, retirement and succession to the next generation — can help.

Best-selling tax author Evelyn Jacks is founder and president of Knowledge Bureau and program director for the Distinguished Advisor Conference which will celebrate its 10th year in 2013 in beautiful Ojai, California. Follow her on Twitter @evelynjacks.


Planning to leave work means planned savings

If early retirement — enforced or chosen — is in the cards, take advantage of employer-provided pre-retirement counseling. This tax-free benefit can save you money.

All too often since the Great Recession of 2008, early retirement begins with termination from employment and a severance package. Or, you may retire voluntarily after long service, in which case you may receive a retiring allowance. Either way, this payment could be the largest lump sum you will receive in your lifetime. If you don’t want it eaten up by taxes, you will want to take advantage of an important tax-free benefit — employer-provided pre-retirement counseling — before you leave your employment. Many employers make this option available to departing employees or will be open to it if you suggest it.

Consider this example. Tom is 58, single and — until Oct. 15 — earned $65,000 a year working at the local manufacturing plant where he had been a supervisor for the past 10 years. But on Oct. 15, Tom received a layoff notice from his employer, offering him a $50,000 severance package. In combination with his company-sponsored pension plan, which would provide a periodic pension of $4,000 a month, Tom decided to take early retirement.

Wisely, Tom worked with his tax and financial advisors on this pre-retirement strategy. On their advice, Tom asked that his severance be paid to him in two instalments — $25,000 on Dec. 1 and $25,000 on Jan. 2 — saving him $2,700 in income taxes over the two years.

Using an income tax estimation calculator, Tom’s advisors calculated his income taxes for 2012 and 2013. If Tom receives both his salary and the $50,000 severance in 2012, the year of retirement, his taxable income will be about $115,000 this year and $48,000 next year. This would result in a tax bill of slightly more than $33,000 in 2012 and $8,000 in 2013. The total tax bill for the two years would be slightly in excess of $41,000.

But by splitting the severance into two $25,000 amounts paid over two tax years, Tom’s taxable income will be closer to $90,000 in 2012 and $73,000 in 2013, decreasing his tax bill for the two years by $2,700, enough to cover some of his monthly bills or to contribute to his Tax-Free Savings Account or his RRSP. That’s where an investment advisor can add real value, offering tax-efficient investment products to improve performance but at the right cost.

It’s Your Money, Your Life. Pre-retirement counseling is a great investment, particularly because it’s a tax-free benefit of employment. Taking advantage of this opportunity to work with your tax and financial advisors will make you richer.

Evelyn Jacks is president of Knowledge Bureau and an expert author of 50 books on tax and tax planning, including the new Jacks on Tax, available later this month. She is also a keynote speaker at this year’s sold-out Distinguished Advisor Conference, Nov. 11-14 in Naples, Fla. Follow her on Twitter @evelynjacks.


New relationship? Beware of tax consequences

If you have a new relationship in your life, it’s important — although often not the first priority — to understand the tax consequences of living with your sweetheart in a family unit.

The Canada Revenue Agency has very definite ideas of who is or is not a spouse for income tax purposes. Here’s what you need to know about your primary “conjugal” relationship with your new significant other.

For tax purposes, a spouse is someone to whom you are legally married. A common-law partner, on the other hand, is not your spouse but a person of the same or opposite sex with whom you have lived in a relationship for a continuous 12-month period, or someone who at the end of the tax year was the actual or adoptive parent of your child. Note that separations of less than 90 days do not affect the 12-month period.

All tax rules that apply to a spouse apply equally to a common-law partner. You claim your spouse on your income tax return under the Spousal Amount if net income levels are low enough; ditto, a common-law partner. You also qualify to transfer other provisions, such as the age or disability amount.

In addition — and this is where expensive mistakes can occur — you will have to combine the net income of both partners for the purposes of claiming refundable tax credits. Also, your new family unit will be allowed only one tax-exempt family residence, not two. If each spouse owns a residence, real estate valuations are required when spouses cohabitate. One of those properties will become a taxable residence.

It’s Your Money.  Your Life. Don’t be taken by surprise by the tax consequences of your new relationships. When your marital status changes, it’s good to be proactive in finding out about your new obligations. See a tax professional to understand the impact.

Evelyn Jacks is president of Knowledge Bureau, which offers wealth-management and income tax preparation courses within its curriculum.  You can also offer financial education books to your clients or family members. For more information, click here.