Tax season is coming, and as savvy individuals, we understand that optimizing deductions is the key to a substantial refund from the Canada Revenue Agency (CRA).
While the basics of claiming deductions are well-known, there exist lesser-known strategies that can significantly enhance your tax refund.
In this comprehensive guide, we unveil a two-step process that goes beyond the conventional advice, ensuring you make the most of your tax filing.
Claim Your All Tax Deductions
The first step in securing a larger tax refund revolves around reducing your taxable income. It’s not just about the routine deductions; it’s about strategically leveraging every eligible credit and deduction in your favor.
For those in conventional employment, common deductions include donations, tuition, and student loan interest. However, if you’re self-employed, the horizon of deductions expands.
Self-Employed? Claim What’s Yours
As a self-employed individual, the array of deductible expenses is vast. Beyond the usual suspects like home office space and transportation costs directly related to work, self-employed individuals can claim licenses, subscriptions, and even electronics used for business purposes.
The rule of thumb is simple – if it’s a legitimate business expense, claim it. Maximize your deductions to minimize your taxable income.
Strategic Portfolio Management for TFSA
While the first step focuses on reducing taxable income, the second step involves a strategic approach to your Tax-Free Savings Account (TFSA). The composition of your TFSA portfolio plays a pivotal role in maximizing your tax refund.
Priority of Holdings in TFSA
Not all investments are created equal in terms of tax efficiency. Prioritize interest-bearing bonds within your TFSA for optimal tax savings.
Following closely are dividend stocks, with non-dividend stocks taking the rear. The rationale behind this hierarchy lies in the varying tax treatment of interest, dividends, and capital gains. By aligning your TFSA holdings strategically, you can unlock additional tax savings.
The Dividend Tax Credit Advantage
Delving deeper into the world of dividends, let’s examine the compelling case of holding dividend-paying stocks in your TFSA.
Consider an investor with the maximum TFSA contribution room of $95,000 invested in TD stock, yielding approximately $4,750 annually in dividends.
The Intricacies of Dividend Tax Credit
The mechanics of this fiscal phenomenon hinge on your marginal tax rate. For those with a tax rate of 15% or lower, the dividend tax credit surpasses the pre-credit taxes, resulting in a cash payment from the CRA.
In the case of TD Bank dividends, a $4,750 dividend generates a $983 tax credit. This calculation involves grossing up the dividend by 38% and then applying the marginal tax rate.
In the realm of taxes, the game is won by strategically lowering your income. The dividend tax credit emerges as a powerful tool to achieve this objective.
For those with a lower tax rate, holding dividend stocks outside the TFSA becomes a financially rewarding move.
Regardless of your tax bracket, refrain from adding stocks to your TFSA until you’ve completed your bond acquisitions.
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In conclusion, mastering the art of tax optimization involves a dual-pronged approach – claim every eligible deduction, and strategically manage your TFSA portfolio.
By following these steps, you position yourself not just for a tax refund but for a maximized one, putting your financial interests at the forefront.