Year-end strategies to cut your tax bill
During the hectic holiday season, the last thing you want to think about is your tax bill for the year. But there are a few year-end tax tips that could save you a few bucks in tax come next April. Here are some of my favorites.
Pay now, save later
A number of payments that you can make before year-end will give you a tax benefit for 2014. These include charitable donations (you can still do it online to ensure your donation is processed for 2014), and investment-related expenses used to earn income, like interest payments on money borrowed for investment purposes, investment counselling fees, even safe-deposit box rental fees.
While not strictly investment-related, ensure you make any necessary medical or dental payments for items not covered by provincial health plans. These include such things as glasses, prescription drugs, and hearing aids. Pay before year-end and you can add them to your medical expense deduction for the year.
Avoid December mutual fund purchases
If you buy a mutual fund in December in a non-registered account, you could end up paying tax without ever having made a buck in gains. It all has to do with year-end distributions made by mutual funds, which impact net asset value. Why pay for someone else’s distribution? Wait, and invest in January. Keep in mind that this won’t necessarily apply to exchange-traded funds. Check with your financial planner before making any mutual fund transactions around this time of the year.
If you’ve got some losing stocks in your portfolio, consider selling before year-end if you wish to use losses to offset any gains you might have made earlier in the year on other investments. To qualify for a 2014 tax loss, the settlement must take place in 2014.
Because it takes three business days to settle a transaction, the last possible day to sell securities to be eligible for a capital loss in 2014 is Dec. 24 for settlement by Dec. 31, 2014. For U.S. exchange-traded stocks, different rules apply, and you may have another day’s leeway. But check with your broker or advisor now, while you still have time, to be absolutely sure you can meet the various transaction deadlines.
Make registered contributions
Contribute to registered plans like RRSPs, TFSAs, and RESPs if you haven’t already done so. True, most plans let you accumulate and carry forward contribution room into future years, but why wait? The sooner you contribute, the sooner you start earning tax-advantaged compound growth in your plan. In the case of RRSP contributions, you’ll get a 2014 tax deduction for contributions made in 2014 (and up to March 3, 2015, for contributions earmarked for 2014).
Defer RRSP/RRIF withdrawals
And if you’re planning a withdrawal from your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), wait until January if you can. Withdrawals from these plans are included in your taxable income for the year. By deferring a withdrawal if you can until early 2015, you’ll put off the tax hit for another year.
Year-end business tax tips
If you’re a business owner, consider buying computer and other equipment now rather than deferring purchases to January. Your capital cost allowance (CCA) will increase for the year, even though you’re entitled to claim only 50% of the allowable CCA (the “half-year rule”). In addition, your CCA claim for next year will be that much larger. Likewise, delay disposition of depreciable assets until January so as to avoid reducing your CCA claim for 2014.
You might also look at areas where you can bring forward deductible business expenses into 2014, for example, advertising or supplies. And on the other side of the coin, consider delaying business income due in December until January (if you have a Dec. 31 year end), thus reducing your tax bill for the current year.
The strategies I’ve outlined here won’t apply to everyone, and may be subject to other tax rules and restrictions. As always, consult with a qualified advisor when contemplating changes to your investment portfolio or when considering tax-driven business strategies.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.