What To Do With Your Tax Refund and How To Avoid Owing
Well, the tax filing deadline date has come and gone. If you were diligent and filed on time, you find yourself in one of three possible scenarios right now.
1. You owe nothing – the ideal place to land.
2. You are receiving a refund, which means you overpaid your taxes. This is a debatable point of view but we say who wants to ever do that!
3. You have an outstanding balance owing
Let’s explore some ideas of how to avoid owing on your taxes and how you can make your return most useful.
5 Ways to Avoid Owing at Tax Time
If you find yourself in a situation where you owe at tax time, and rather it seems to be a recurring issue year after year. Here are some tips to mitigate that scenario:
1. If you have multiple sources of income, this is often the root cause of owing more at tax time. Make sure each source of income you’re receiving is taking off enough tax to account for your “overall” tax rate.
2. Do some pre-return tax planning before the RRSP deadline date (March 1st) to determine if you will owe tax. Knowing this in advance allows you to make an RRSP contribution which could reduce the amount of tax owing. Why not pay yourself vs. paying CRA!
3. Make sure you are taking advantage of all available tax deductions and credits available to you.
Claiming deductions, credits, and expenses – Personal income tax - Canada.ca
4. Keep diligent records of all receipts!
5. File your taxes on time to avoid having to pay filing penalties and accruing interest. Self employed individuals have until June 15th to file your returns but keep in mind if you owe, you need to pay your tax bill by April 30th to avoid late fees.
CRA charges an immediate 5% late penalty and then 1% interest on your outstanding balance each month…Ouch!
5 Ways to Allocate Your Tax Refund
The best news you can hear, “you’re getting a refund!” and as mentioned this is not exactly a job well done in terms of tax planning. However, whenever someone is issuing you a cheque you were not expecting, it’s a good day. It’s very tempting to see it as a windfall you can guiltlessly spend on things you want rather than need. And while there’s usually no harm in setting at least part of it aside for such expenditures, the reality is that, for most Canadians, the lion’s share of the refund is best used in other ways.
1. Pay down debt. Always. Sending money to creditors isn’t much fun, but it may help relieve some anxiety by reducing your debt obligations (credit card bills, car loan, lines of credit, etc.). Especially with today’s higher interest rates, paying down debt can have a huge impact on your finances, leaving you with significantly more money in your pocket each month.
2. Invest for the future. Using a tax refund to invest is a proven way for money to earn its own money, which can help build long-term wealth. We can help you decide which investments are most appropriate for your objectives, risk tolerance and time horizon. Investing in a registered vehicle like an RRSP, TFSA or RESP also provides the benefit of tax-advantaged growth.
3. Contribute to an emergency fund. Whether you already have an emergency fund or want to start one, putting away some money for a “rainy day” can be a great use of your tax refund. It’s typically recommended to have several months of expenses in an emergency fund, in case you lose your job, experience a death or major illness in the family, or need urgent home or vehicle repairs.
4. Donate to charity. The pandemic put a spotlight on the struggles many people face, and how many organizations that commit to helping others deserve greater financial support. When you dedicate some of your tax refund to charitable causes that hold meaning for you, not only are you helping people in need, but you also earn donation tax credits that can lower your future taxes!
5. For teens - put towards education fees. This is a timely way to get a head start on tuition fees etc. Teens who are working part time jobs all year often receive most of the tax deducted back in the form of a refund. Those fortunate enough to pay all your children’s education costs, it’s a good idea to have them contribute too. Their tax refund can really help cover some expenses. Even if you want to pay for it all, have them contribute! It’s one of the most valuable lessons you can teach your children.
6. Enjoy yourself. As mentioned, it’s often okay to spend some of your tax refund on something pleasurable, like a trip with the family or some retail therapy.
Just know that your tax refund isn’t “found money” or a “Gift” from CRA. It was always your money to start with and should be used wisely. As previously mentioned, getting a big refund is an indicator that you paid too much tax during the year.