The time to file for your tax refund is upon us. When it comes to filing our tax, some of us leverage organization, while others have room for improvement.
In this article, we’ll look at ways to make the most of your tax refund as well as getting organized so that you’ll end up with an even bigger tax refund.
Money smart ideas on what to do with your tax refund
Many Canadians are expecting tax refunds this tax season. Regardless of whether you’re getting a small or significant amount from the taxman, it’s a good idea to use your tax refund wisely.
While there’s nothing wrong with treating yourself to something nice, it’s equally important to recognize this as an excellent opportunity to improve your financial situation.
Pay down credit card debt
Is your credit card debt causing you a lot of stress in your life? Using some or all of your tax refund to pay off high-interest debt such as credit card debt might be the jumpstart you need. If you’re only making your minimum monthly payment, most of your payment is going towards the interest. This makes it tough to lower your overall debt level.
To get the biggest bang for your buck, you’re better off choosing a single credit card to focus on paying off. Choose the credit card with the highest interest rate or the smallest balance, whichever you find the most motivating.
Start an emergency fund
Financial emergencies are one of the most common reasons Canadians find themselves in debt. Everything is going along perfectly fine when a sudden financial crisis comes up; the car breaks down, or the roof on your home needs repairs. Without adequate emergency savings, you find yourself using your credit card to cover those surprise expenses.
Instead of being caught off guard, it’s far better to plan ahead. Start an emergency fund if you haven’t already. Take this year’s tax refund and put some or all of it towards your emergency fund. You’ll be happy you did next time a financial emergency comes up, and you’re better prepared.
Tackle home renovations
One way to boost your net worth is by tackling home renovations. Many home renovations will add value to your home, but not all. While adding a basement apartment, a new kitchen, and bathroom yield the highest return on investment, renovations like adding a pool can hurt the resale value of your home.
Before doing a home renovation, ask yourself if it’s for personal preference or if it’s to help with resale value. Improvements for personal reasons is fine as long as you’re planning to stay in your home long-term. Otherwise, you’re probably better off doing a renovation that will help with the resale value or skipping the restoration altogether.
Put your tax refund towards homeownership
Homeownership has become increasingly challenging these days, especially if you’re buying in a big city like Toronto or Vancouver. Homebuyers are finding that they have to take out larger mortgages to purchase a home. Homeownership has become more challenging with the introduction of the mortgage stress test, which limits the amount home buyers can borrow as a down payment.
If you’re not happy with how much you’ve been pre-approved to spend on a property, one of the ways you can counteract the stress test is by saving a larger down payment. If you’re a first-time homebuyer, your tax refund could go straight into your Registered Retirement Savings Plan (RRSP) to help you reach your down payment goal sooner.
For those who aren’t first-time homebuyers, the Tax-Free Savings Account is an excellent place to park your tax refund to go towards your down payment.
Getting a bigger tax refund
Are you in the habit of filing your tax return at the last minute and you want to be better prepared and more organized this year?
I hate to break it to you, but tax season is an impossible time to avoid. Unless you’re an accountant or you work for the Canada Revenue Agency (CRA), you probably find filing your taxes tedious, complicated and intimating.
There are two things certain in life: death and taxes. As we get closer to the April 30th tax filing deadline, many of us find ourselves left scrambling to get our taxes filed on time.
Tax planning should be a year-round activity. Here’s a reminder about some things you can be doing to help maximize your tax return this year and for the years to come.
Organization is crucial in making time season less expensive and painful. You can start by gathering last year’s tax return along with any tax slips you have, such as T3, T4 and T5. Be sure to include all of your receipts for any tax credits or deductions you plan to claim. Keeping track of those in a file folder or Microsoft Excel spreadsheet makes life a lot easier.
File by the deadline
The simplest way to make the most of your tax refund is by filing by the deadline. By submitting your tax return by April 30th, you can avoid paying penalties to the taxman. Although you have until April 30th to file your tax return, it’s probably not a good idea to wait until the very last minute to submit it.
Aim to file it toward the end of March or the beginning of April at the very latest once your T3 slips arrive. If you aren’t receiving any T3 slips, you might consider filing as early as mid-February.
Take advantage of non-refundable tax credits
The federal and provincial has a slew of non-refundable tax credits Canadian tax filers can claim. Tax credits include the enhanced dividend tax credit, Canadian caregiver credit, first time home buyers’ tax credit and the political contribution tax credit. If you don’t know about these tax credits, you might overlook them and fail to claim them even though you’re entitled to them. By taking some time to familiarize yourself with them, you’ll be more likely to claim them at tax time.
Claim the GST/HST tax credit if you’re in a low-income household. The GST/HST tax credit depends on your family’s net income, plus the number of dependent children you have.
If a new child is born, you might find yourself qualifying for it when you had not before. Claim it to see if you qualify.
One of the simplest ways to lower your income tax bill is by contributing to your RRSP. You have until 60 days into the New Year to make contributions to your RRSP that count towards last year’s tax return. Not only will you get a bigger refund, but any money that you contribute to your RRSP will also grow tax-free. It’s a win-win situation.
Claim your student loan interest
Did you pay any interest on your student loan? If so, you may be able to claim it on your tax return. In fact, you may be able to claim student loan interest going back five years.
Claim your cell phone as a tax deduction
Does your workplace ever call you on your cell phone? If that’s the case, you can deduct a “reasonable” amount for your business cell phone usage on your tax return. Just make sure you keep track of your cell phone minute usage and how much is personal versus business.
Claim childcare expenses
Childcare is not an inexpensive cost. Luckily the government is there to lend you a helping hand. If you’re a single parent, both your partner and you work full-time, or one of you is attending school for at least part of the year, you can claim an amount for childcare. The amount you can claim depends on the age of your child, with parents of younger children being able to claim more.
Don’t provide the government with a tax-free loan
While most Canadians celebrate getting a tax refund, it’s not something to be happy about. A tax refund is basically an interest-free loan to the government. If you find you’re always getting significant returns and you’d rather put the money to better use, you can complete tax form T1213.
By completing Form T1213 and handing it over to your employer, less income tax comes out of your paycheque. That way, you can invest the money right away instead of letting it sit all throughout the year with the government and not make a penny off of it.
Some services like H&R Block offer immediate returns. This can help you get your tax refund sooner; however, it’s important to note that it’s valid only on the federal portion of tax returns in Quebec.