Tax Time
Tax Time
The end of February is nearing and I figured I had better get started on my taxes. This year is a little more complicated for me as I have employment income, rental income, self-employment income and I sold my rental property. I have been completing my own taxes since participating in the volunteer tax preparer program almost 20 years ago. I used pencils, paper, erasers for the first draft and plugged away on a calculator. How archaic.
I have a handle on almost everything except the sale of the rental property for a loss. Where did I turn for information? The had all of the information that I required to complete my return.
Other online resources that I refer to for information and suggestions are the and. Both are excellent resources. My favorite resource is . A new edition is published every year and is a must have resource if you are going to complete your own taxes. It also contains some financial planning advice.
After getting all of my receipts and documents organized I started inputting numbers into . I have used this free tax software for the last 4 or 5 years. It is very straight forward and in the one year I emailed a question in I received a response withing an hour. Not bad for free software. If you use the software and like it consider making a donation to the developers.
After about an hour I had 90% of the information organized and inputted. I have to contact a lender this week to find out where an annual mortgage statement is and then I will be able to submit my return. The other good news is it looks like I will only be paying a couple of hundred dollars this year. I would have been paying in excess o $5,000 if I had not had my employer take off extra taxes and made an installment payment in January. Overall this tax season was not that painful for me.
I have made some mini resolutions to make this year's taxes easier.
- keep receipts and documents more organized (in 2010 I just dumped them into a file folder and organized later)
- keep track of self employment income and expenses in Excel on a monthly basis
- project what I will owe for 2011 more accurately so I can either make an installment payment or have my employer take additional money off of my pay cheques
After spending some time on the Canada Revenue Agency webpages I found a link to be a onceagain. I am curious about the training offered and the software provided to prepare people's returns. Unfortunately to participate I would have had to register by January 31. I missed the boat for this year but I have set a reminder in Outlook so I can volunteer.
Do you do your own taxes? What software do you use?
Income Tax Quarterly Installment Payments
I have filed my taxes this year and have mailed the Receiver General a cheque dated April 30, 2010. Due to my business income my tax liability was in excess of $3,000. I am not complaining as I was able to use the government's money for the whole year, but nautrally they don't like this. Like everyone else, if you owe them money the sooner they get it the better.
If I have to send them in excess of $3000 again for the 2010 tax year they will ask me to pay my taxes in quarterly installments. My business income is sporatic so I do not want this to happen. This was an easy fix. I simply supplied my employer with a requesting more tax be taken off of my cheque. Although I will get paid less every month, I will not have the same tax liability in the spring of 2011.
If you work a part time job you may want to consider doing the same. Your part time employer will only be considering your part time income when they take tax off of your cheques. This will likely require you to pay taxes the following spring.
If you want to read more about quarterly installments check out this from the C.C.R.A.
Free Money
There has been a long term debate of whether people are better off paying down their mortgage or contributing to RRSPs. Due to the variables of tax brackets and the return on the RRSPs there are no clear cut answers. Most of the time the opinion given is do both, contribute to your RRSP and use your tax refund in the spring to pay down your mortgage. This “meet in the middle” approach is good but can be optimized to give you some free money and have you debt free a little sooner.
Most people are aware that if you contribute to an RRSP you should see a tax refund in the spring. The bad news is the C.C.R.A. has held onto your money for the whole year and then given it back to you without interest. The math does not work out in your favour. The good news is it doesn’t have to be that way.
You can go to your Human Resources department and ask to fill out form T1213 Request to Reduce Tax Deductions at Source. For example let’s say that you are contributing $600 per month to an RRSP and every spring you get a tax refund of $2,400 as a direct result of your monthly RRSP contributions. That refund is great, but the C.C.R.A. has owed you a little bit of that money every month. Once you fill out the form you will now see an extra $200 monthly on your pay cheque . Unfortunately you will not get a refund in the spring. The C.C.R.A. will take your monthly RRSP contribution into account and tax you less. You have your money now! What good does this do you? Well, now instead of a $2,400 lump sum mortgage payment in the spring you can increase your monthly payments by $200. It makes a big difference.
A $250,000 mortgage at 6% with monthly payments of $1,487 has an original amortization period of 30 years. Add the $2,400 prepayment every spring and you save $81,634 in interest costs and your house is paid for in 22.5 years. Not a bad deal at all.
If you don’t make a $2,400 prepayment every spring and instead increase your monthly payment by $200 you will save $84,620 in interest and have your house paid for in 22.33 years. For about an hour of your time you have saved just under $3,000.
I believe that the little things make the difference and this little rearrangement of your finances will help you pay off your mortgage faster, save you money, and help you be debt free faster!