As you’re finishing up your 2021 tax return, you may be thinking your tax work is done until next spring. But getting a jump-start on next year’s taxes can help you get organized, saving you time and money when April 2023 rolls around.
Here are four steps you can take now to prepare for next year’s taxes.
1. Check your withholding
Your employer is required by the Canadian Revenue Agency (CRA) to automatically withhold Employment Insurance premiums, Canada Pension Plan contributions, and income tax from your paycheck. In some cases, you may end up owing income tax or receiving a refund as a result of the amount your employer withheld.
If you faced a large tax bill this year, consider raising your withholding to avoid another hefty bill next year. You can raise your withholding by filling out Form TD1 and giving it directly to your employer. On the other hand, if you received a large refund, you may want to lower your withholding. After all, overpaying your taxes over the course of a year is tantamount to an interest-free loan to the government, and that money could go further in your own bank account. Fill out Form T1213 and submit it to your local tax center with a note and supporting documentation about why your withholding should be reduced. The CRA will send you a letter of authority if you qualify, which you can give to your employer so they can reduce your withholding.
2. Maximize your deductions
One of the best ways to take advantage of deductions and significantly cut your tax bill is to max out contributions to your Registered Retirement Savings Plan (RRSP). You can generally contribute up to 18% of your previous year’s income up to an annual maximum. In 2022, the RRSP maximum contribution limit is $29,210, an increase of $1,380 from the 2021 contribution limit.
Other tax-deferred or tax-friendly accounts that can lower your tax burden include Registered Education Savings Plans (RESPs) and Tax-Free Savings Accounts (TFSAs). The annual contribution limit for TFSAs is $6,000 in 2022. There is no annual contribution limit for RESPs, but the government will only match your first $2,500 in contributions annually. There is a lifetime contribution limit of $50,000 for RESPs.
3. Check your tax bracket
Rising inflation and a tight labor market mean many people are asking for raises or switching jobs in search of higher salaries. If you’re making more money in 2022 than you did in 2021, you could be pushed into a higher tax bracket. If so, you may want to consider ways you can offset those taxes, like contributing more to retirement accounts, education savings accounts, or charitable giving.
An advisor can also provide guidance on strategies like tax-loss harvesting, which involves selling underperforming investments at a loss to offset taxable income.
4. Get organized
Keeping detailed records may not necessarily lower your tax bill, but it can make the process go much smoother when it’s time to file. Get organized for next year’s taxes by designating a folder for work-related expenses, medical records, and last year’s tax forms.
Other deductions you’ll want to keep track of include childcare expenses, capital losses, union dues, medical expenses, and charitable donations. If you’re a small business owner and you moved at least 40 kilometers to run your business, you can also claim several moving-related expenses as write-offs. Make sure you are tracking all these expenses, so they are easily accessible for next year’s tax filing.
You’ll also want to keep track of income slips either from an employer or any self-employed income you receive. You might also want to designate a separate space for storing statements of investment income, securities transactions, and capital gains information.
Preparing for tax time several months in advance and putting strategies in place to lower your tax burden can pay off come tax time in April. Take steps now to get prepared to file your 2022 return.