Simple Tax Saving Tips for Anyone
People who work for either the CRA or the IRS often feel stressed out because their jobs are so taxing. 😆 Everyone has to pay taxes of course, but here are a few easy tax saving tips that you can use to minimize your tax burden.
- Income-split with your trusting spouse.
It’s easy to shift the tax liability from a family member with a higher income to a family member with a lower income to reduce the overall tax a household has to pay. Opening a joint non-registered account allows couples to income-split any capital gains down the road, which can save a lot of tax money if one spouse earns more than the other. And if anything happens to one person, the other person takes over the entire account with no messy legal or estate business. A spousal RRSP strategy can also achieve similar results.
- Earn more money from investments, instead of working.
Capital gains and dividends are taxes less than active income such as from salary or wages. For example, in Canada, you can make up to $50K a year without paying any income tax, 😉 as long as all your income comes from eligible dividends. This is why it’s so important to prioritize investing over spending, especially at the beginning of someone’s career. Once an investment portfolio is large enough it will have enough momentum to continue growing by itself without any more additional savings. A job delivers high-risk income because it’s relatively common for jobs to be lost, along with the income. But investment gains, on the other hand, are low-risk. Counting on a steady stream of dividends in a diversified portfolio is much more reliable than relying on income from work or from running a single business.
- Make use of tax-advantaged accounts.
401(k) and IRAs can be used by Americans to shelter their taxes. In Canada, the best vehicle we have is the Tax-Free Savings Account (TFSA.) The combined TFSA contribution room for a couple is $82,000 today. That is more than enough to invest in a broad range of low-fee index funds, where the future gains won’t be taxed. If you manage to max out all your TFSA room, or if you’re a high-income earner with 140K+ salary, you have up to $25,000 of contribution room in your RRSP for just this year alone. Max out all your tax efficient vehicles before buying stocks, bonds, or ETFs in a regular cash (or non-registered account.)
By using just the 2nd and 3rd tips in this post, I save more than $5,000 of income tax every year. A little planning can go a long way!
Random Useless Fact: