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Avoid These 10 Common Tax Mistakes
Filing your income taxes can be confusing. Avoid these 10 mistakes and keep yourself on track for success.
1. Missing Required Information
Give this yearly chore your best shot. Gather all the required information in advance: the reporting slips, dated receipts, and all necessary documents. If you’re filing online, you won’t have to send these in; but if Canada Revenue Agency (CRA) comes calling, you must prove your claim. Always keep seven years of records available.
2. Filing too Late, Too Early, or Not at All
Your filing deadline is April 30th; or, if you’re self-employed, it’s June 15th. If you file late, any refund (and some federal benefits) could be delayed. If you owe taxes, the late-filing penalty is 5% of your total, plus 1% more each month, and a few layers of interest charges. Filing early means you could miss some investment slips and be at risk of misreporting income. Even if you had no income, file anyway. You can collect your benefits, claim certain expenses and tax credits; and might get money back.
3. Incorrectly Claiming Deductions and Expenses
Not knowing which deductions or credits to use; what medical expenses are allowed ̶ these are great ways to pay too much tax. Get up to speed about the rules this year through the canada.ca site. As an example: if your medical expenses are high compared to income, you could get part of your costs refunded. New deductions for 2020 include: Simplified Home Office Expenses, Canada Training Credit, and the Canada Pension Plan Enhancement.
4. Not Budgeting for the Tax Bill
2020 is unique for some, due to the tax owed from Covid-related benefits. Are you ready to pay a tax bill that’s higher than you were expecting?
5. Misreporting Marital Status
If you’ve been cozily sharing space for at least 12 months, the CRA calls this a common-law relationship. If you share a child, it becomes immediate. You must report it. Some benefits, such as the GST/HST Tax Credit or the Canada Child Benefit, are based on your combined incomes.
6. Missing the Income Splitting
The higher-income spouse can reduce their taxable income by splitting up to 50% of pension income. Or contributing to a spousal Registered Retirement Savings Plan (RRSP). You can also pool or transfer some tax credits and use this to bring down one partner’s higher bill.
7. Not Sharing With Your Family
Students with low incomes, who don’t need the $5,000 tuition tax credit, can share it with a parent or grandparent. Spouses can share the disability tax credit. You can also pool medical expenses and charitable donations, then apply the deduction to the partner who can best use it.
8. Misreporting Income
Your investment income must be reported. That side hustle must be also. Including hosting people at your Airbnb, driving and delivering, and selling merchandise. The good news is you can claim many expenses from self-employment.
9. Forgetting About Mistakes From Previous Years
Now you know the mistakes not to make. So, take a look at previous years. Making important corrections removes the fear of penalties. You might also have missed deductions that could save you some tax.
10. Not Planning a Yearly Strategy
It may be tax season, but smart financial planning happens throughout the year. Keeping receipts; staying on top of new deductions; leveraging RRSPs and other tax strategies; it all helps your bottom line.
Boost the success of your financial plan with accurate tax reporting. Ask your Financial Advisor for more tips to help you get it right.