Year End Tax Planning
December is almost over. And while it’s time to wind down, it’s also the perfect time to tackle some last minute tax planning opportunities that could save you money this tax season.
Here are some things to do before January sneaks up:
Defer a loan payment
Yes, we’re really telling you to defer a payment. In fact, many lenders allow a one month break from principal payments around Christmas. This can be a great way to squeeze some extra cash out of your pockets to help cover holiday expenses. Car payments and mortgages will be the big ones, just ask your lender what they can do for you.
TD bank calls this option a Payment Pause and RBC calls it Skip-A-Payment. These options allow you to skip the equivalent of one monthly mortgage payment, once a year, up to 4 times during the amortization of your mortgage. The interest missed from that skipped payment is added back on the principal of the mortgage.
Maximize your medical expenses
Your medical expense deduction is your eligible expenses during the year less $2,237 (or 3% of your income, whichever is less). In other words, if you make more than $75,000 per year and had $2,000 in medical expenses this year, you would get no deduction for tax purposes. If you had $3,000 in medical expenses, your deduction would be $763 ($3,000 - $2,237).This means that if your expenses are over $2,237 during the year, you want to maximize the deduction.
Fill your prescriptions, get those new glasses, see your chiropractor, dentist, physiotherapists, psychologist, nutritionist, dietitian, and even stock up on those medical cannabis products that have a long shelf-life - take action now and get the most tax dollars back in April.
Use your Health Spending Account
The unused balance in most HSA’s expires on December 31, so use it or lose it! Again, fill your prescriptions, order glasses or prescription sunglasses, get a massage, new orthopedics - any discretionary health spending you can do to use up that balance.
In certain circumstances, it can make sense to buy or sell some investments before Dec 31. You may have realized some significant capital gains during the year, in which case you could sell some of those loser investments at a loss, which would lower your taxable capital gain.
If your investments are held in a corporation, it may also be prudent to sell shares that have appreciated significantly, to crystalize the capital gain. Half the capital gain is currently added to the Capital Dividend Account, from which a tax-free dividend can be paid. Keep in mind you will need to pay tax on half the capital gain, in order to get the other half tax-free. The federal government is trying to eliminate this, but is having a tough time figuring out how to do this. The safe play would be to crystalize the capital gain and pay the Capital Dividend as soon as possible, before the rules change.
Get 50% of your donations (over $200) back in saved taxes. Get 25% back on your first $200 in donations. You can save up your tax receipts for up to 5 years and claim them all in one year to maximize the 50% rebate. For more details on this, read our last blog called Donating Responsibly: https://www.truenorthaccounting.com/blog/donatingresponsibly
Pay year end bonuses
If you have a small business, you have flexibility when it comes to paying your own compensation. Depending on your income this year and your expected income next year, you may save some tax dollars by optimizing the timing of a bonus to yourself, or even to your staff. Run the numbers and make an informed decision - don’t be afraid to ask us for help with this.
Pay a dividend
With the new “income sprinkling” rules coming into effect Jan 1, this could be your last chance to pay a dividend to that family member that will be impacted by the TOSI (Tax On Split Income) rule change. For a more detailed discussion on this topic, please refer to our previous blog on Income Sprinkling: https://www.truenorthaccounting.com/blog/income-splitting
Year end purchases
For Sole Proprietors and corps with a Dec 31 year end, this is your last chance to maximize your write-offs and minimize taxes for the year. It might make sense to order and pay for that new computer or new piece of equipment prior to Dec 31.
Maximize income generating investments
This is your last chance to act before the tax rules change around passive income held in a private corporation. Taxes on passive (or investment) income are increasing drastically after Jan 1, 2018, but currently held investments may be grandfathered in. Everything is still uncertain, but one potential strategy would be to move investments from growth to income-generating prior to Dec 31, 2017 so they can be grandfathered in at the old rates. After Jan 1, 2018, it will be more favourable to invest in growth stocks. For more details on this, see our previous blog on the subject: https://www.truenorthaccounting.com/blog/passive-income
Have questions about year end tax planning? We’d love to help. We have CPAs with extensive knowledge of the changing tax laws – including ones related to self-employed professionals like yourself. We provide bookkeeping and tax services to small business owners in Okotoks and Calgary, including everything from deductions, write offs, expenses, tax returns, GST filing and more.
True North Accounting
Photo by Ben Blennerhass on Unsplash