As 2006 quickly approaches, let me encourage you to avoid the "deer in the headlights" effect. Taxpayers too often fail to consider the fact that the new year is coming at them, and when it's just about here and they finally stare at it face-to-face, they make no moves to protect themselves from the tax collector for the coming year -- usually because they're not sure what to do. Let me make things easier for you by sharing the top 10 tax strategies to consider for 2006.
Give assets to a child.
Move future income to a lower-taxed child. How? By making a gift of cash or investments to an adult child to invest. With minor children, future capital gains (but not other income) can be taxed in their hands. Remember, gifts in-kind may trigger tax since you'll be deemed to have sold the assets at fair market value.
Lend money to your spouse.
Move income to a lower-taxed spouse by lending money to your spouse to invest. (Be sure to charge the prescribed rate -- just 3 per cent until March 31, 2006; this rate can be locked-in forever.) You'll successfully split income to the extent your spouse earns more than the prescribed rate on the investment.
Change your will.
Consider creating what's known as a testamentary trust in your will so that income-producing assets you leave to your heirs are not left directly to them, but to a trust for their benefit. The result? Tax savings. Your heirs can split income with the trust. See my article dated Sep. 27, 1997, at timcestnick.com.
Change location of your assets.
To the extent you have investments both inside and outside your registered plans, you should hold your equities outside those plans since they are more tax-efficient than interest-bearing investments. Interest income is taxed highly and should be held inside those plans if possible.
Make your interest costs deductible.
If you have cash or liquid investments on the one hand, and debt with non-deductible interest costs on the other, consider paying down that debt using the cash or investments. Then, reborrow to invest. Properly investing the new loan proceeds will create an interest deduction. Your total debt won't change, but the interest deduction will save you tax.
Start a home-based business.
A part-time home-based business will open the door to deductions for many things you're paying for anyway. I'm thinking of mortgage interest, property taxes, home insurance, costs related to your vehicle and computer, repairs and maintenance, landscaping, and more. You can also split income by paying family members salary or wages.
Look for a new job.
If you earn employment income from a "prescribed international organization," you're entitled to a deduction for the full amount of your income. Organizations that qualify include the United Nations and certain organizations that have a special relationship with the UN.
Request reduced source withholdings.
If you know you'll be deducting certain amounts on your 2006 tax return, you may be able to apply today to reduce the tax deducted from your pay at work throughout 2006. File Form T1213 as soon as possible to enjoy the higher take-home pay for as long as possible in 2006.
Make donations a regular habit.
Rather than donating at the last minute next year, why not help your favourite charities -- which need help throughout the year -- by donating monthly in 2006. By the way, if you still want to save tax for 2005, it's not too late to donate to your favourite charity. Visit canadahelps.org and donate on-line with your credit card before midnight tonight, and receive your donation receipt by e-mail right away.
Watch your days in the United States. If you spend more than 122 days a year, on average, in the United States and you do this for three consecutive years or more, you'll have U.S. tax filings to think about. In some cases, it may be one form to file (IRS Form 8840), and in other cases it may be a full-blown U.S. tax return. Limit your time in the United States to fewer than 122 days a year to minimize the complexity of your tax filings. Visit a tax pro if your days down south exceed this amount.
Tim Cestnick, FCA, CPA, CFP, TEP, is a tax specialist and author of Winning the Tax Game 2005 and The Tax Freedom Zone.
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