Tax strategies part two
Saturday, December 7, 2002
If you tuned in last week, you were introduced to some last-minute tax strategies you should consider to save tax for 2002.
This week, we'll finish that list. Let's jump to it.
Contribute to a registered retirement savings plan.
You have until March 1, 2003, to make a contribution to your RRSP or a spousal RRSP that will entitle you to a deduction on your 2002 tax return. Make that contribution sooner rather than later to get that money working for you as soon as possible. Even if you're not sure where to invest yet, contribute to your RRSP and "park" the cash there until you've made a decision about what to invest in.
Make an advance contribution.
If you turned 69 in 2002 you've got to wind up your RRSP by year-end. If you also have earned income in 2002, which will provide you with RRSP contribution room in 2003, consider making that 2003 contribution in December, 2002, before winding up your RRSP forever. You may face a small overcontribution penalty for the month of December, 2002, but you'll be entitled to a tax deduction in 2003 for the contribution you made in December, 2002, and this will save you more tax dollars.
Withdraw funds in a low-income year.
Does it ever make sense to withdraw money from an RRSP or registered retirement income fund (RRIF) before you need the money? If you have little or no other income this year, you may be able to make a tax-free withdrawal from the plan.
It could make sense to do this where you are willing to invest that money outside the RRSP or RRIF once it's withdrawn, or where you need the money to meet certain costs of living.
Maximize your 2002 earned income.
It's not too late to increase your earned income for 2002 in order to provide greater RRSP contribution room for 2003. This is particularly easy if you own your business and can readily control your compensation. Once your earned income for 2002 reaches $75,000, you'll reach the maximum RRSP contribution limit of $13,500 for 2003.
Base withdrawals on age of younger spouse.
If you turned 69 in the year, chances are pretty good that you'll be establishing a RRIF by year-end for at least some of the assets in your RRSP. Be sure to base the mandatory RRIF withdrawals on the age of the younger spouse. This will reduce the required withdrawal annually and will allow you to defer tax longer.
Buy an annuity for the pension credit.
If you're age 65 or older, you're entitled to a credit to offset your first $1,000 of pension income. Consider using some of your RRSP dollars to purchase an annuity before year-end that will pay out $1,000 annually. The annuity payments will qualify you for the pension credit, which will offset the tax on the annuity payment if you're in the lowest tax bracket ($31,677 federally for 2002). If your income is above this, there will be a tax cost, albeit it could be a small cost.
Make moving expenses deductible.
If you're a student who lives at least 40 kilometres away from home during the school year, be sure to claim moving expenses for your move to school and home again. To be entitled to make a claim, you'll have to earn some income while at home and at school (a taxable scholarship or award can count as income). You can deduct costs of travel, shipping and transportation of your stuff, among other costs.
Pay loan interest before year-end.
Students are entitled to claim a tax credit for interest paid in the year on a qualifying student loan. The interest can be paid by the student or a person related to the student, but only the student is entitled to claim the credit. If the credit is not used in the current year, it can be carried forward for up to five years for use in the future. Pay those interest costs by year-end to entitle yourself to a tax credit for the interest costs.
Make expenditures before year-end.
Certain payments should be made before year-end to entitle you to tax relief in 2002. These include: Union dues, professional memberships, child-care costs, medical expenses, charitable donations, investment counsel fees, interest costs, alimony and maintenance, moving expenses, political contributions, deductible legal fees, safety deposit box fees, tuition costs and tax shelters.
Adjust your instalments.
You may discover that your income for 2002 has not been as high as you expected, and that your instalments in 2002 have been higher than necessary to cover the taxes owing for 2002. In this case, consider reducing the amount of your Dec. 15 instalment.
Tim Cestnick, CA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, Tax Smart Services, at AIC Ltd.